Property outlook
Finally, interest rates are falling for the first time in over six years. The outlook for property investment is starting to improve and income returns to investors are growing as a national building shortage pushes up rents.
Strong population growth in Australia is driving a need for new housing, which isn’t being met by supply. Vacancy rates have dived across the nation and rents have risen to record levels, which is putting money into landlords’ pockets.
Property’s attraction will rise as interest rates fall. Westpac is forecasting a total cut in interest rates of 100 basis points by early next year. The Australian economy is slowing and oil prices have fallen, which is taking pressure off inflation. Lower interest rates will help to improve home-loan serviceability for property owners.
Rental growth is likely to stay strong over at least the next two years. Australia is enjoying very strong levels of immigration attracted by low levels of unemployment and an ongoing skills shortage. We’re not building enough to satisfy demand. As long as the population keeps coming in, we will not have enough space to house all the immigrants.
With strong population growth and the urbanisation of the population, inner-city areas of capital cities will perform relatively well. A flow of people to the cities will push up rents and property yields. The shortage of accommodation is greatest in Sydney and Brisbane, as migrants flock to those cities attracted by job opportunities. Even if developers started building more now, the lead-time needed for development to complete ensures the accommodation shortage is here to stay for some time yet.
The nation’s population grew by 1.5% during the 12 months ended 30 June 2007, with overseas migration accounting for most of the gain in numbers.
All states and territories experienced positive growth over the 12 months, with Western Australia recording the largest percentage gain of 2.3%, followed by Queensland at 2.2% and Northern Territory at 2.0%.
That growth is keeping pressure on rents. Over the year to March 2008, rents jumped as vacancy rates remained below 2% in many parts of Australia.
Rental growth for houses ranged from 8.0% in Adelaide to 44.1% in Darwin, with workers flocking to the Territory attracted by the mining boom. In Perth, rental growth was slowing but remained strong at 15.5%, according to Market Facts data from the Real Estate Institute of Australia.
In Sydney and Brisbane, rental growth was 14.3% with Canberra not far behind at 12.4% and Melbourne at 12% over the year to March 2008.
Rental yields are expected to rise into next year, with property prices not likely to climb quite as sharply as rents. This is likely to provide a new focus on residential investment, particularly if interest rates fall as we expect. The differential between mortgage rates and property yields should narrow, making the serviceability of investment loans easier.
However, it is still a case of recognising property investment as a long term investment, as we don’t expect a surge in values over the short term. For investors looking to enter the market, stick to what you can afford and don’t overstretch yourself. Work out your budget and choose the type of property you can afford. Units in the inner city might be an affordable option or a house in a quickly-growing outer suburb – as long as the location is good, you’ll enjoy good gains over the long term.
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