After years of boom conditions, it’s easy to forget that downturns and rising interest rates are part and parcel of property investing. What really matters is how you respond to these challenges.
Let's explore how other property investors are stepping up to the challenges and whether they’re seeing opportunities in the current market.
There’s one benefit for property investors that’s coming out of higher interest rates: bigger negative gearing tax deductions.
The Western Australia government is considering a raft of changes to the state’s tenancy laws, including the removal of ‘no grounds’ evictions.
New York’s 84-level Steinway Tower has just been completed and has become the world’s skinniest skyscraper at just 17.5 metres wide.
The share of sales selling for below purchase price pre-COVID was above 16%, according to PropTrack data.
During COVID, between March 2020 and March 2022, that figure dropped to just over 10%.
Between March and June 2022, it fell again to 6%, meaning fewer recent sellers are making a loss.
Concerns and second thoughts
Buyers have indicated they generally would rethink their intentions if interest rates were to continue rising, according to a survey conducted by API Magazine in July 2022.
- About 70% of the 557 respondents would do so if the rate increased to a forecast 3.35%.
- 51% said they would if the rate increased by between 1.1% and 3% (with a 1.75pp hike occurring in the past 4 months, this has already happened).
- Almost 20% said they would if the rate increased to between 0.25% and 1%.
Sellers appear to be more confident.
- Only 27% said interest rates would affect their decision to sell or hold.
- 73% said it would not affect their decision-making
Perhaps surprisingly, interest rates are not the biggest concern for respondents, but it’s up there in the top 3.
- 12% named affordability as their top concern.
- 12% see finance as their greatest worry.
- 11% are most anxious about interest rates.
Market Sentiment
Property sentiment was a mixed bag.
- 42% had a positive outlook towards the property market.
- 37% said they felt neutral.
- 21% felt negative about the market.
However, the number of people who expect property prices to fall in the next 12 months outnumber those who think it will increase.
- 35% expect prices to fall.
- 29% still expect prices to rise in the coming year.
- 23% reckon they will stay the same.
- 13% were unsure.
Game Plan
Regardless of sentiment, most people have grand plans for the next 12 months.
- 26% still want to buy real estate.
- 13% plan to renovate.
- 12% intent to lease out a property.
- 11% are looking to sell.
- 8% plan to build.
Detached houses still trump all other property types when it comes to buying preferences.
- 45% are focused on buying a detached house.
- 17% are looking at units/apartments.
- 14% are considering townhouses/villas.
PLAY THE LONG GAME
One finding from the survey is that many buyers are basing their investing plans on interest rate movements.
It should be the goal of every investor to avoid knee-jerk reactions to temporary negative events. While almost every investor knows this, many end up doing the opposite.
One of the best things you can do during a market slowdown is to stick to your fundamentals: focus on your long-term investment objectives and strategy. Remember, property investment is a long-term game.
KEEPING FAITH IN A MARKET REBOUND
Positive sentiment was shared by the majority of respondents (42%), yet most also reckon prices will fall in the next 12 months (35%).
On a surface level, this may appear to be a contradicting finding. However it suggests that the majority believe that the market will bounce back.
Going further, it could mean that many are confident that the downturn seen in some sub-markets is merely part of the property cycle.
AS SAFE AS HOUSES
In the current downturn, units have seen smaller value drops than houses in the combined capital cities.
- Units were down by -1.8% in the 3 months to July 2022.
- Houses were down by -2.8% in the same period.
But survey respondents have barely changed their preference of houses over units in the past 6 months.
- In the Q4 2021 survey, 16% were considering units.
It’s a given that freestanding houses have traditionally enjoyed the strongest capital growth and because of this, it has long been the most sought-after asset type for investors.
However, with affordability found to be the most significant concern, many may have to rethink their preferences.
Prices at a glance
Houses
Units
Australian property prices ballooned by 28.6% during the pandemic in 2021, culminating in a market peak in April 2021. Now, following three consecutive months of price falls, values are -2% below that peak.The capital cities that saw growth in both houses and units include Adelaide, Perth and Darwin. Brisbane unit values are still increasing but the city’s houses have begun to dip by more than -1%. It’s the first time Brisbane saw median prices fall since August 2020.Price movement in the combined regional cities are following in the footsteps of the capital cities, decreasing by -0.2% in July. It’s proof that even the regional centres, which also haven’t seen median prices drop since August 2020, are feeling the impact of the downturn.
