Why now could be the time to invest in residential property
It’s often said that Australians have a love affair with property. But it’s not just owning our own home that we aspire to. Many also choose to invest in this asset class as part of their wealth creation strategy. Indeed, residential property has always been a popular investment option.
If this is something you’re considering, there are a number of drivers in the market now that are making it an attractive investment to consider.
One of these factors is the historically low interest rates. The Reserve Bank of Australia has been cutting rates in an effort to build confidence in the economy – low rates make it cheaper to borrow money for a range of investments, including property – and it appears it has been successful. Confidence in the property sector is high, especially among investors.
Strong capital growth occurring
This confidence is reflected in the strong capital growth the housing market in many parts of Australia is experiencing.
According to the Australian Bureau of Statistics, the mean price of residential homes across the nation rose by $17,700 in the December quarter to $539,400. Most of this growth was in Sydney where values rose 4.7 per cent in the quarter. This compares with 3.3 per cent for Perth, 2.6 per cent for Melbourne and 2.8 per cent for Brisbane.
Investors continue to drive much of the activity in the property market and they accounted for about 40 per cent of the value of home loans issued in December 2013. That’s the highest proportion of loans going to investors since October 2013.
Benefits of property investment
So what’s the attraction of investing in property? As well as the potential for capital growth, property is regarded as a good long-term investment and tends to be regarded as a safe haven when other types of assets (such as shares) are experiencing volatility or falling in value. For example, the heat is now coming out of the mining investment boom and this could be one reason investors are looking elsewhere, such as at the property market.
When an investment property is tenanted, you obviously also receive rental income, which helps you pay off your mortgage – and with the current situation of low vacancy rates (i.e. the proportion of empty properties out of the total available for rent) yields are high.
Yields often fall as house prices rise but the low vacancy rate is leading to increases in rent in many areas, which is keeping yields strong.
What is negative gearing?
Another attraction of investing in property is the ability to negative gear. When you’re negatively geared, it means that the costs of your investment are higher than the return that you receive from it. And if you’re a high taxpayer, this is an advantage.
The costs associated with a property include the loan itself plus any deductible expenses such as interest charged on the loan financing the property, management fees or allowable repairs and maintenance, while the return includes the rent you receive.
By being negatively geared, you can deduct the costs of the property from your total income and this reduces your tax bill.
Taxpayers that benefit the most are high-income earners – although buying a property purely for the tax advantages is not a sound strategy. Any investment should be based on the investment itself and where it fits into your overall plan.
And if you’re wondering what’s the point of having an investment that you lose money on, then remember over time the property, if bought ‘right’, should appreciate in value.
Financing an investment property
It is important to get the right loan structure upfront so you can benefit the most from the tax advantages.
There are a range of loans available for investment purposes. Interest-only loans have historically been very popular but when capital gains were flat these went out of fashion. Now more investors are choosing principal and interest loans so equity can be built up.
You may have already built equity in a property. If so, you may be able to borrow against the equity you have to purchase an investment property. Only the interest on the investment property is tax deductible, so if this is your strategy, you may want to take out separate split loans to make the accounting easier.
Property has proven time and time again to be a worthwhile investment over time, especially when other asset classes are experiencing uncertainty. With the attraction of the mining sector as an investment diminishing and with historic low interest rates, it may be a good time to talk to your lender about having a property investment as part of your overall portfolio.