Are you thinking of buying residential property?

Interest rates have dropped, auction clearance rates have increased. The median price of homes in Melbourne has increased in the last quarter and is expected to continue to increase due to Victoria’s growing population.

Nonetheless now is still a good time to buy.

Residential property is one of the top performing asset classes over the last ten, twenty and even thirty years. After businesses, it is the main driver of wealth in Australia.

Residential property is a funny asset class. It does not behave the way other asset classes behave. It’s not driven by economics. It’s driven by emotions: lifestyle aspirations, social consciousness, perceive social standing, success, greed, fear and a myriad of other emotions impact the buy sell decision. An increase in interest rates creates fear and a more than proportionate response, skewing the dynamics towards the buyer.  And there is no objective market price, as there is for say shares. The buy sell negotiations are personal and there is plenty of room for psychology. People will sell good assets for bad reasons over the next few months.

Now could be a good time to buy.

Long term supply and demand drivers

Clearance rates in 2016 are not dropping, and they are perhaps are not likely to in the near future.

Listening to Channel Nine recently, there has been reporting of another 2.5M dwellings required in the next 15 years. And considering we are now only at 9M dwellings, that is about 30% more than what we currently have. And this is just to cover our current population growth. 

As anyone in the world will tell you, Australia is the best place in the world to live, and as things deteriorate in other areas around the world, our population may grow even faster than it has been currently. Property prices in the long term may go up substantially.

A long term proposition

It takes nerves of steel to buy when the market is up. Contrarian investment strategies take guts. But that’s where the money can be made. Residential property is a very long term investment: you should be at least working on a ten year time horizon, if not twenty years. And well located properties in good condition will prove to be very good investments over that time frame. Who cares what happens in the first three months after you buy?

Think of your children: a key recommendation to our clients is to have as many residential property investments as you have children. The idea is that the family is the relevant economic unit and it is hedging itself against runaway prices in the future.

There is a body of thought that places this as a much better head start than a private school education. Who knows? But it is food for thought.

Property as an investment

Property is a tangible asset, bricks and mortar, something you can see and touch. It exists. It is there. This is a big reason for its popularity. The residential property market is more stable than the share market. Clients are less likely to panic and rush to sell based on short term considerations.

Clients will have more control over property than shares and they can add value to by renovating or rebuilding. Residential property rents usually increase in line with inflation.

There is steady demand for good rental properties in most areas. If the landlord is prepared to meet the market in terms of rent then he or she will almost always find a tenant, and the Sunday papers horror stories are not that common in the real world: most tenants take reasonable care of the property and some take great care, treating it as if it was their own.

Tax treatment boosts your returns

Think of your tax bill. The property obviously has to stack up as an investment, with the key criteria being location and condition. But once that is ticked off the heavy tax benefits can make the investment sing. The maths of the matter are that most heavily geared residential properties break even on cash flow once the tax break is factored in. This means only modest increases in prices translate to large percentage returns on investments.

We stress buying residential property is a ten to twenty year proposition. Take your time and evaluate the proposal carefully before you commit. Get expert advice if you think it is needed. There is an abundance of good quality information at your local book store

One tip: always buy residential property in your own name or your spouse’s name and “and or nominee”. This gives you 14 days as of right to insert a nominee, such as the trustee of a family trust, into the contract without setting off double stamp duty. The estate agents are familiar with the process here and will have the extra forms for you to sign as nominee easily at hand.

A warning about inner city apartments

The last few years have seen a trend to inner-city apartment living. All we can say is that there are apartments and apartments, and great care should be taken if you intend to go down this road. Problems abound. These range from the quality of the workmanship, over-supply issues, body corporate management issues, noise and privacy issues and views being damaged as new projects come on line.

In some cases commissions of more than 10% are being paid to the selling agents, which sadly includes many accounting and financial planning firms.

Officers from the National Australia Bank recently told us that they would not lend more than 70% of their assessment of market value (which is usually less than the amount paid) and certain developments were off the lending list altogether due to serious concerns with the quality of the underlying work.

Think seriously before buying an apartment. It is a lot safer to buy something that comes with its own piece of land.