Puzzle Finance Blog

Cold reality to hot property

Investors be warned, there is no guarantee the property pot of gold won't boil over.

Intending property investors hoping to make a quick killing in Sydney and Melbourne's hot real estate markets should be careful. While RP Data reports Sydney property prices rose 13 per cent during the past year and Melbourne prices rose 7 cent, there is no guarantee the price rises will continue at the same pace.

Those who plunge into overheated property markets in the hope of making quick capital gains could be setting themselves up for a loss, says Sydney real estate agent Peter O'Malley, author of the top-selling book Real Estate Uncovered.

Would-be landlords should do their homework, have a decent deposit and be prepared to invest for the long term as capital gains may be harder to come by, O'Malley says. Property investors who borrow too much are exposing themselves to big risk. "I have seen [property] price corrections in my time and this idea that they never go down is not correct," O'Malley says. "I can show you dreadful losses after people have bought in a bull market like this one," he says.

"Their circumstances change, such as divorce or financial hardship, and they become forced sellers," he says

"They may lose only 10 to 15 per cent of the purchase price but that is 100 per cent or more of their equity.''

They could end up with negative equity; where homeowners owe more to the lender than they have received in the sale proceeds from the property.

O'Malley's book breaks ranks with the real estate industry. He reveals the underside of real estate agents and property markets and lays out the traps that await consumers new to the world of property.

That has made him unpopular with some real estate agents.

The book helps those buying and selling family homes, but his major concern is would-be property investors lured to the market by the prospects of quick capital gains.

O'Malley entered the real estate industry in 1997 at the age of 19 and says he has always been surprised by how many novice property investors make the most basic mistakes. There are investors who look at the gross yield (the annual rental income divided by the purchase price and multiplied by 100) without properly accounting for the costs of the investment.

They are then hit by expenses from all sides - property management fees, maintenance costs, rates and insurance, he says. While the gross rental yield on the investment property may be a "commendable" 5 or so per cent, their net return, the return after costs, is often closer to 1.5 or 2.5 per cent, he says.

Louis Christopher, the managing director of specialist property researcher SQM Research, says the average gross yield for units in Melbourne is 4.3 per cent and 4.7 per cent in Sydney.

"I think gross yields will fall over the next 12 months, because we are expecting property prices to rise faster than rents," he says. He says a vacancy rate of between 2 and 3 per cent usually indicates a market that is in equilibrium between landlords and tenants.

Docklands and Southbank in Melbourne, which are dominated by units, have vacancy rates of about 7 per cent, one of the highest in either Sydney or Melbourne, Christopher says.

In September, the Reserve Bank of Australia said in its Financial Stability Review it is "important that those purchasing property maintain realistic expectations of future dwelling price growth".

The Reserve Bank said that long-run future growth in dwelling prices might be expected to be more in line with income growth. While mortgage rates are likely to stay low, economists are expecting household income growth to slow as the peak in the mining boom passes.

Posted by John Collett - Money Manager (Fairfax Digital) on 8th December, 2013 | Comments | Trackbacks

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