REAL ESTATE BOOM OVER – WHERE CAN YOU MAKE MONEY NOW?

It is very clear that the Australian real estate party is over – for now at least. Many investors are wondering where to direct their focus now, since making money in property is no longer about just buying something – anything, and hoping for the best.

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Over the past decade you could pretty much just buy in your own backyard and wait, earning capital growth by default and thinking you were a smart investor. It’s going to take a lot more than that in the next decade. And it is likely you won’t be investing just in the city in which you live – there may be better investment opportunities for you elsewhere. It is also inevitable that you will be building a diversified portfolio of short & long term investments, having some oriented at capital growth and others at income. This is the next generation way of investing.

Strong price growth over most capital cities in the years since the GFC in 2009 have meant that there are now major issues in terms of real affordability for owner-occupiers. For investors, we now have to contend with very tight financing rules in place by the major banks, at the behest of APRA and rental yields that are so low as to almost make it unviable to buy and hold investment real estate. The few reasons it still works is that interest rates are at historical lows and look like staying there, at least for the next twelve months or so and there are still tax benefits through negative gearing – though who knows if the government of the future will tinker with this too?

What that means is that is becoming more difficult to expand your investment property portfolio by borrowing from the banks to own real estate. Remember, real estate investing is usually best done with the long term in mind – by that I mean is you are buying a property in your own or a company or trust’s name, you should be thinking at least 10-20 years out, not just whether you will get growth in the next 12 months. That focus can be a little different if you add next generation investing techniques to your wealth building portfolio. Often then you are investing in projects that ideally will have 10-15% p.a. returns over periods of 1-3 years. These deals may be to augment your income or to build capital to invest in to longer term real estate holding.

You can find out more about next generation investing by checking out Brickraise here.

However, if you are able to invest on your own, without the next generation crowd – where should you be looking?

It’s always hard to know – nothing is certain when we are “crystal balling” and without knowing your circumstances or investment aims, pointing you in the right direction can be challenging indeed. What I can do is give you my analysis of where I think the most growth may occur over the next 2-3 years. Then you need to decide how you go about what you do with my observations.

Have a good look at the two charts below – Core Logic RP Data provide excellent statistical information and these are no exception. What do you see?

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The first thing I would encourage you to do is ignore the green bar which represents the “Australian 8 Capitals Market” – there is no such thing. To add up all the growth figures across the capitals and then average them and come up with a number is meaningless. It is like saying all the suburbs across the city in which you live can be directly compared – they can’t. Each city is different and unique and works on different growth cycles than the others.

Historically speaking, the premier market in Australia is Sydney. It tends to grow first, followed by its rival Melbourne. When these cities get relatively too expensive, people tend to look north to Brisbane and south to Hobart, when the property looks cheaper. Then growth tends to head west to Perth and finally back to Adelaide. Canberra seems to work on no particular cycle and its fortunes tend to ebb and flow with the relative size of the Federal Government – it’s a tough market to pick.

You can see for the chart on the right that since January 2009, Sydney & Melbourne have had 76% & 66% growth respectively. This is growth that is three times that of Canberra & Darwin (around 24%), and about 5 times that of Brisbane. Perth & Adelaide, who all came in between 12-14%.  Melbourne was the leader over the last 12 months at nearly 10% while Sydney, at seemingly the end of its 3 year boom still grew at a strong 7.4%. Brisbane & Hobart performed well at around 4.5%, while Adelaide chipped in with just over 3%. Both Perth & Darwin had drops in values on the back of weakening commodity prices. The latest Perth numbers I have seen lead me to believe it may have bottomed there, which is a good sign as a foundation for the next growth phase.

Based on this and other research I do on a continual basis, I think the best opportunities in the next 2-3 years are as follows:-

  1. Melbourne – apartments & townhouses priced from $400-$800k on solid transport lines – trains & trams & near cafes and entertainment precincts. Avoid CBD – aim for 3-20km from city. There is evidence the market is cooling, however Victoria has very strong population growth and employment growth – this bodes in its favour.
  2. Brisbane – homes, apartments & townhouses 5-15km from the city, near motorways or train lines and shopping centres – pricepoints $300-$700k. Avoid CBD & inner suburbs that look like having a strong supply of very tall apartment towers.
  3. Hobart – homes in suburbs less than 10km from Hobart. Price range $275-$425k. Local shopping centres & strong suburban community facilities are important here

I think that beyond that timeframe Perth still has an excellent chance to outperform from 2017-18 onwards – keep an eye on employment figures, migration, immigration, housing supply, interest rates and commodity prices – particularly gold, iron ore, oil/gas, wheat & sheep. It is hard to know when the cycle will restart but the good news is over the next year or so you should be able to buy very well if you are patient and do plenty of research. Though this approach requires a counter-cyclical approach – buying when nobody else is.

If you are among the many who just won’t be able to take part in real estate investing on your own, I suggest you check out the next generation of real estate investing at Brickraise. The platform will offer you opportunities to invest in projects around the country that we expect could return 10-15% p.a. – and you will be able to take advantage of the different real estate cycles across our nation.

In this way you won’t have to wait years to get in to the real estate investing world – you can start right now.

Please note: I reserve the right to delete comments that are offensive or off-topic.