A look back in time shows investors need to get smart and do their homework before jumping into property investment.
Seasoned investors or newcomers to the property market should do their homework before lunging into a property deal. Gaining an insight into where our markets have been, and are going, contributes to key decisions around property investment.
Growth in the national housing market has been much slower over the past five years than it has been over earlier periods. The onset of the financial crisis and the subsequent lower levels of economic growth and higher level of household caution have impacted growth in home values.
According to the RP Data-Rismark Home Value Index, capital city home values have increased at an average annual rate of 2.8 per cent over the five years to July 2013 or total value growth of just 14.8 per cent.
To put this into context, over the five years to July 2008, capital city home values rose at an average annual rate of 6.1 per cent and over the five years to July 2003 they rose at an average rate of 13.6 per cent.
Based on these figures, it appears that as the cost of housing has increased relative to income levels, the rate of capital gain is slowing, as you would expect. Given this, investors in the market need to get smarter and look for new locations which offer stronger capital growth potential. They also need to focus more on the rental returns than just the capital growth of the asset.
If we look at the performance of the Statistical Divisions (SD) across the country and their capital growth performance over the five years to June 2013, we see that it has been areas linked to the mining and resources sector or other regional parts of the country that have typically recorded the strongest capital growth.
On the other hand, coastal markets linked to the tourism sector or that were previously popular with ‘sea changers’ have typically recorded the weakest performance.
Over the past five years, the strongest capital growth has been recorded in areas that included Wimmera, VIC (11.2 per cent pa), Northern Territory (outside Darwin) (10.3 per cent pa), and the Central Highlands, VIC (9.7 per cent pa).
Looking at rental growth over the same five-year period, you find that the strongest rental growth has been contained mostly to regions linked to the resources sector while the lowest levels of rental growth has been within coastal and lifestyle regions.
Over the period, the strongest average annual increases in rents over the past five years have been recorded in areas including South West Queensland (14.4 per cent pa), Pilbara, WA (9.6 per cent pa) and Central West NSW (8.4 per cent pa).
If we look at the results for growth in values and rents you can see that there have been certain areas and policies that have driven the market over the past five years. Firstly, when we look at the best performing areas for value and rental growth, not one of them has been situated in a capital city region.
Secondly, value growth has generally been strongest in areas where values were much lower than those in the state capital city. In Victoria for example, the government had, throughout a proportion of that time period, offered incentives for purchase and additional incentives for construction, of homes by first home buyers in regional areas of the state.
Thirdly, the recent strength of the resources sector has really driven rental rates significantly higher in these areas. This highlights the tightness of supply in many resource regions and strong demand.
Finally, those regions that have underperformed have generally been hampered by slowing population growth and weakness in their broader economic conditions. In many instances, the weaker performing areas had also enjoyed very strong growth in values and rents leading up to the current five years.
The important thing when investing is to undertake a thorough analysis of the area and the economic drivers. Although the resources sector has been very strong over recent years, commodity prices are now lower than their peak and our terms of trade have also peaked meaning that their investment fundamentals are unlikely to be as strong over the coming years.
On the other hand, a market like Brisbane has been hampered by floods, slowing interstate migration and a very strong run-up in values in the lead-up to the current period. With rental yields above the capital city average and population growth rebounding, its prospects may be stronger over the coming five years.