I was talking to my colleagues the other day and the topic turned to investor sentiment. We all agreed that in recent months there has been a perceptible rise in negativity about investing in property. Now generally we Aussies are a pretty positive-minded bunch, especially when it comes to property but I think the recent barrage of negativity in the media has really had an impact. That’s not to say that people have stopped investing, but they’re delaying investing. They’re waiting for something to happen. That something is either; the market to turn, banks to ease borrowing requirements, their job to be more secure, the economy to improve or their income to increase, etc etc.
They all sound like valid reasons to hold off, right? But what if I said no, they’re not?
You see the Australian economy, the property market, your job, your life … all these things are dynamic, forever shifting and changing and moving. If you’re waiting for everything to be just right before you invest then you will be waiting forever and all you will have achieved is watching others make money. If you think back 5 years there were challenges for investors then and just as seemingly valid reasons not to invest or to hold off. As someone very clever once said, ‘the biggest risk is to do nothing’.
Granted, it’s a bit more challenging now than 6 months ago or a year ago but the key is to understand what those challenges are and how to address them so that you don’t make an uninformed investment decision. There are an awful lot of excellent investment opportunities out there begging to be taken advantage of, you just need to have the courage to grab them. Courage however comes with knowledge.
What is the landscape likely to be in the coming 6 – 12 months? What should you be acutely conscious of now so that you’re not caught by surprise in a years’ time. The biggest challenge will be rising interest rates. Every day there is more and more talk of interest rates going north. The Domain’s, Chris Kohler, wrote, ‘the worst hit will likely be those who waded into frothy capital-city housing markets at the tail end of the boom. In its latest meeting the RBA warned that as many as eight official rate hikes are on the way as the cash rate heads for a new normal of 3.5 per cent, while the Australian Prudential Regulation Authority has raised bank equity targets by 150 basis points to 10.5 per cent.’ You can read the full article here.
Even if the cash rate does hit 3.5% and interest rates exceed 6% that does not mean you should not invest right now. What it does mean is that you should spend time really understanding your cashflow. Do not work on the assumption that the loan interest rate will be today’s rates of 4-4.5% pa. Be pessimistic and add 3% to that figure. Don’t stop there though. I also suggest knocking down the expected rental income. If the estimated rental income is $500 per week, knock it down to $450 per week. STRESS TEST THE LIFE OUT OF THE NUMBERS BEFORE YOU COMMIT TO A PROPERTY.
If you do this and you can still afford the weekly commitment that is required from your cashflow then you are not leaving yourself open to a nasty shock in the future.
Finally, as always, look to buy the absolute highest quality property your budget allows.