When the Numbers Add Up, Investors Return
The best time to enter the residential market is when the number stack up. This boils down to one thing: the difference between the interest rate you pay and the rental return you’ll receive.
Currently this gap is narrowing and I expect this will continue for the next six to 12 months.
This provides an ideal window of opportunity for first-time investors to enter the market and buy at competitive prices before the broader mass catches on to what’s happening, enters the market and drives property prices up again.
In 2001 the rental return for many Sydney investment properties was about 4 to 5 per cent while the RBA’s official interest rate fell over the year and bottomed out at 4.25 per cent.
The numbers attracted investors who began competing aggressively and drove property prices sharply upwards for the next two years.
By the end of 2003 the cash rate had risen to 5.25 per cent while rental returns had dropped 3 per cent in the wake of strong investor completion and property price rises. The difference between holding costs and rental returns widened to about 4 per cent. By 2008 multiple interest rate rises had widened the gap to 5 to 6 per cent.
Meanwhile the rental market was in historically low supply with vacancy rates of less than 1 per cent n some areas of Sydney and rents were being pushed up substantially.
By mid-2008 the official cash rate peaked at 7.25 per cent in March and began dropping sharply from September. High rental prices have seen rental returns climb back to 4 to 5 per cent of property values.
With every indication further cuts are likely as we move into 2009, the costs of holding investment property is falling once again to levels not seen since the last property boom.
Mark Armstrong is a director of Property Planning Australia and the Property School. Property Watch, Sydney Morning Herald, 30 November 2008.
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