After the Reserve Bank raised the cash rate for the first time in a decade, everyone who has an interest in property is now wondering what happens next?
- Will the housing market crash?
- Will inflation create a recession?
- Should I buy a property now?
Above all, the key concern for homeowners, property investors and people looking to sell, is 2022 and 2023 going to be a disaster, as mortgage rates soar and housing prices are predicted to fall by as much as 10% in capital cites by the end of next year? For prospective buyers, now could be the worst time to purchase property because of the spiral in interest rates, rising inflation and the uncertainty of the cost-of-living pressures.
Is there a right time or a wrong time to invest in property?
The property market experienced an unexpected boom during the COVID-19 epidemic which begs the question – The experience and real estate sales data in the last 2 years confirms that proposition that there is NO right or wrong time to buy. Buying property is not simply a once off event, but rather a process.
Whether you are an investor or buying your first home you need to consider the following:
- Develop a strategic property plan, so you know where you’re heading and what you need to do to achieve your financial goals
- Set up the right ownership structures to protect your assets and legally minimise your tax
- Access to finance. Property investment is a game of finance with some houses thrown in the middle, but even owner-occupier demand is very much driven by the availability of finance and the expected rise in interest rates
- Consider what factors determine a property’s price performance and growth trajectory, many of which are well outside of your control, and some which also have nothing to do with the property itself
- The economic outlook. External factors outside your control will impact on people’s ability to buy and sell. Employment levels impact on the market as stronger employment growth increases the market demand
- Government housing policy. There are a range of government support packages that are aimed at increasing home ownership
- Supply in the market. Australia is heading for a housing supply crunch despite the population taking a major dent due to the COVID-19 crisis, with fresh demand set to again outpace supply within a few years. The latest State of the Nation report from the government’s expert housing advisers highlights the need for reforms to supply side policies and backs Reserve Bank of Australia governor Philip Lowe’s view that fixing supply bottlenecks is a key element of keeping house prices stable in coming years.
Property Pricing Outlook | 2022 and beyond
Moving forward, property values should increase throughout 2022, but at a much slower rate of growth than 2021. Last year rising property values around Australia were driven by a combination of pent-up demand and historically low interest rates leading to FOMO (fear of missing out), which led many home buyers and investors to take shortcuts just to get in the market.
One of the leading indicator to monitor are housing finance approvals. These are still at high levels suggesting that many Aussies are still looking at getting into property, meaning we will have continuing strong ongoing demand from owner-occupiers and now even more investors as the year moves on. Over the last year, the apartment market hasn’t grown as strongly as the housing market, but now with the in price between units and houses at the highest level on record, and houses becoming more unaffordable for many, we see strong capital growth in family-friendly apartments. Rents should also keep increasing as there is a desperate shortage of good rental accommodation.
The Commonwealth Bank of Australia is predicting the house price growth rate to slow down substantially in 2022 and then fall back in 2023. Market watchers are predicting a price slump between 5 per cent to 10 per cent during 2023. ANZ is also predicting a similar pattern. They expect a more considerate downfall in house prices i.e. 4 per cent in 2023. But the bank’s economists do not expect official interest rates to rise until the first quarter of 2023. Among other predictions, Shane Oliver, the chief economist at AMP Capital anticipates the interest rates to rise by the end of 2022 and the property prices to rise by about 5 per cent.
Should you invest in 2022?
Despite the interest rise there are a combination of multiple growth drivers to give investors an opportunity to take advantage of the current strong phase of the property cycle. Consumer confidence is still robust as more people than ever see this as a great time to invest in property or upgrade their homes. COVID-19 is under control and the economy is still improving with record employment levels. The inflationary pressures is an indication that the economy is recovering. There are more buyers and sellers in the market and despite the recent rate rise, mortgage rates are still low. Moving forward further jobs creation, consumer confidence and business confidence (leading to spending and employment) will underpin our housing markets.
The suitability of property investment depends on your investment goals and your risk profile. Downward pricing pressure will affect buyers looking to enter the market for the first time as well as reduce the cost for property investors looking to expand their portfolio. Most property markets around Australia have performed strongly so far this cycle (other than the inner city of high-rise apartment market) and the rate of property price growth will slow and there are several factors that will shape the market.
Affordability issues will constrain many buyers. The impetus of low-interest rates allowing borrowers to pay more has worked its way through the system and with property values being 20- 30% higher than at the beginning of this cycle at a time when wages growth has been moderate at best and minimal in real terms for most Australians, means that the average home buyer won’t have more money in their pocket to pay more for their home.
Demand. While there are always people wanting to move house and many delayed their plans over the last few years because of COVID, there are only so many buyers and sellers out there and there will be fewer looking to buy in 2022. Lending controls and APRA regulation is intent on slowing down markets which will result in a two-tiered property market. Some areas will boom while others will cool.
Tax Minimisation. If your investment goal is to reduce tax through property investment, you need to consider if the property will reduce you tax. Negative gearing may not be an optimal strategy for you and you must get advice from you accountant. Negative gearing may be a short -term funding strategy which only makes sense when used to purchase high-growth investment great properties. These tend to be established houses, townhouses, or apartments in desirable streets in top locations in the middle ring suburbs of our three big capital cities.
Investment Strategies. If wealth creation and planning for retirement is one of your primary reasons for investing in property, there is no get rich quick scheme. Property investment requires research, advice from your accountant and your finance broker. If you can’t afford an investment-grade property, either because you haven’t saved a sufficient deposit or you can’t service the loan repayments, then rather than buying a secondary property, it’s better that you wait and buy an investment-grade property
There are a range of factors that you should consider if you are thinking of investing in the property market. If you need advice about asset protection, property tax and even how you should get your finances in line to ensure you qualify for property finance, please feel free to contact our office.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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