All the indications are that property prices are set to rise soon, so now is a good time to buy or fix your loan.
It's often said that when it comes to buying residential property, it's time in the market, not timing the market, that counts most.
In the broad sense, this is true. With costs like stamp duty and agent's fees, it's too expensive to trade in and out of property very often. What's more, a typical property cycle takes at least seven years to complete its circle, so selling prematurely could mean missing out on substantial capital growth.
If you're buying a property specifically for investment, however, timing your entry into the market can make financial sense. As an investor, your ideal aim is to buy the best quality asset, with the highest rental income, at the lowest interest rate possible. The higher your income and the lower your expenses, the greater your cashflow will be. And the greater your cashflow, the better your opportunity to put the extra funds towards paying down debt and shoring up your equity position.
The current point in the property market cycle is a prime example of this principle. After rising rapidly in 2006 and 2007, rents stabilised during 2008. According to Australian Property Monitors, the median rent for Melbourne houses increased marginally in the 12 months to March 2009, from $340 to $350 per week. The median weekly rent for units and apartments fared slightly better, rising from $300 to $320.
It's reasonable to presume that rents have reached their peak in the current cycle. Would-be first home buyers make up a substantial proportion of tenants, and there are signs that many of them are beginning to move from the rental market to the home-buyer market.
In my observations of market activity, auctions of apartments in inner suburban areas such as Toorak, Richmond and Elwood are attracting as many as 200 people. Most of the bidders are first home buyers. The more bidders, the stronger the competition - resulting in clearance rates of around 70 to 80 per cent in many cases.
Large auction turnouts and high clearance rates are a strong indication that property market values will soon begin to climb at the lower end of the market. This anecdotal evidence is backed up by recent statistics. Preliminary results from RP Data show that the median price for all Melbourne dwellings rose by 1.9 per cent in the three months to February this year. This compares with a modest fall of 1.75 per cent during the previous 12 months.
Because investors generally operate in the same price bracket as first home buyers, it makes sense to buy before competition takes hold and prices gather momentum.
At the same time as rents are stabilising and property prices are beginning to move, interest rates appear to be bottoming out. After a series of deep cuts to the official cash rate in late 2008 and early 2009, the Reserve Bank's most recent cut (last month) was a more modest 0.25 per cent. It's possible the bank may keep the current rate on hold until the effects of previous rate cuts and the government's economic stimulus initiatives become clear.
Just as significantly, the nation's larger retail banks have begun increasing their fixed home loan rates. In setting fixed rates, retail banks make an educated bet about the future direction of the Reserve Bank's cash rate. Higher fixed rates indicate that lenders believe the economy will turn the corner in the short to medium term, the Reserve Bank's rate cuts may soon cease, and the cash rate will begin rising once again.
What all this means for property investors is pretty clear. It's worth considering fixing all or part of your loan before the variable rate begins to climb once more.
If you're an existing investor with good tenants, it's sensible to sign them up on a long lease to lock in your current rental income before first home buyers leave the rental market enmasse and rents begin to soften.
If you intend to invest, the remainder of 2009 is a good time to buy.
In summary
- For investors, timing market entry makes financial sense.
- The best time to buy is when rents are peaking and interest rates are bottoming out.
- The lower end of the market is showing early signs of recovery.
- The remainder of 2009 represents ideal buying conditions for investors.
Source: Fairfax
