The year 2017 turned out to be quite a year for property investments. Growth occurred especially in Sydney, while other cities that were predicted to perform well showed no growth at all.
Fast forward to the first quarter of 2018, the property market scene has been far less robust. According to the media, there is a tendency for the market to reach to the end of its growth and is heading for a market crash.
This is far from the truth provided we know where and how to look for performing real estate. As investors, we need to look for all possible risk factors to ensure we will not make the wrong investments in 2018. The goal is to be able to enjoy capital growth over the long term.
Here we point out some of the key risks associated with residential property investment.
Affordability
Affordability remains to be a major driving force in the property market. For example, property in Sydney and Melbourne are considered highly unaffordable. Considering that both cities also deliver low rental returns, further hinders potential investors from investing in their desired properties.
As a way to overcome this, the Australian Prudential Regulation Authority (APRA) extended its requirements for banks to maintain investor mortgage growth to less than 10% per year. Banks are also required to reduce the proportion of new mortgage lending with an interest only option to below 30% per year. Both of these requirements have helped investors to reevaluate their financial capabilities, and encouraged the purchase of investment properties.
Housing Supply
Housing supply has been another contributing factor to the property market. The low supply of houses, particularly in certain parts of Sydney and Melbourne, has significantly driven prices up, making these houses unaffordable to investors
On the other hand, an oversupply of houses, particularly in certain parts of Western Australia, Queensland and Victoria, has made these houses suffer from poor capital growth, making them undesirable for investors.
Lending restrictions have proven to be very effective in addressing the undersupply situation. The Australian Prudential Regulation Authority (APRA), along with major banks, have offered lending restrictions, leading to the end of the property boom in Sydney and Melbourne.
As for oversupply, in Queensland, the government has been taking significant measures to grow its economy. The local property market is expected attract a high number of interstate migrants in search of affordable housing.
Legislation and Regulation
With the potential win of the Labor party, the changes they will bring to legislation and regulation are likely to impact the value and performance of residential properties across Australia.
For now, New South Wales leads in terms of attractiveness for private investors due to its high economic growth and substantial state government investments in key infrastructural projects.
On another note, leading the country in investment serviceability is Tasmania. The state experienced consistent capital growth and strong rental yields for houses and units.
The Australian Capital Territory also showed strong economic growth. The state had the second largest population growth rate in the country, delivering solid capital growth and a healthy property market.
Sustainable Economic Growth
The performance of the property market is also strongly correlated with the sustainable economic growth of a particular state as this leads to a robust employment market and healthy population growth.
One such example is the New South Wales property market. Sydney, in particular, enjoyed a strong property boom until mid-2017. Government spending is on the high, and the state also attracted a consistent level of private capital expenditure, leading to the stability of the state’s economy.
So will the Australian property market collapse in 2018? In a nutshell, 2018 will be a great year for residential property investments as long as you take into account the risks associated with your potential investment. Remember, to achieve good investment results you need to be able to make good investment decisions.
