Sydney property investment may be starting to create a bubble which could lead to price falls when interest rates start to rise again. “Sydney has certainly become a bit bubbly,” says Shane Oliver, chief economist with AMP. “While it’s not a full blown bubble yet, it certainly made some people worry that the strong gains are now fizzing out. The fact that rents and income levels haven’t grown to match these strong price gains is making the Sydney market even bubblier.”
Oliver expects property values to grow by another 8% this year after a further interest rate cut, but believes yield will remain low despite a tight rental market.
“The problem for property investors is that the rental yields have been pretty low as a result of rising prices. I think there will be some upwards pressure on rents but I doubt it will keep up with the strong property values. At the moment, net yield for houses is just 1%, and 3% for units.
“The big risk for investors is the degree of vulnerability. When interest rates start coming up again, you could see prices falling by around 10%.”
The other dangers investors are facing include getting caught up with the buying frenzy and allowing their emotions to rule their heads, according to George Raptis, director with Metropole Buyers Agency.
“Investors may forgo their usual due diligence and get caught up in the emotions of the buying process as they lose sight of the big picture. They are willing to pay whatever it takes to make their dream purchase a reality,” says Raptis.
This could result in buying the wrong type of property in the wrong location and worst, buying one that isn’t considered an investment grade property, according to Raptis.
You could also end up being overcommitted financially and will be exposed when interest rates start rising again.
While there are worries about Sydney property investment prices punching higher records that it cannot sustain, the good news is the economy appears to be growing from strength to strength.
“NSW is now the strongest economy in Australia,” says Oliver.
“I don’t see this reversing any time soon. The lower interest rates, the falling Aussie dollar and the slowing resources sector have been the source of strength for the state.”
Deloitte Access Economics agrees in its report that the lower interest rates are boosting NSW’s fortune.
“Interest rates have always been a good indicator of the economic prospects in NSW,” the report says.
“The state is home to the largest consumer market and mortgage market in the country. Low interest rates act to make existing mortgages cheaper, boost consumer spending power and have contributed to the growing wealth of Sydney-siders in a way that is unmatched in the rest of the country.”
Also, because NSW didn’t have the boom in resource-related construction that was evident in some states, it is not as much risk on the downside according to the report. This means that, while business investment is a shrinking share of Australia’s economy, it is currently a rising share of the state.
Purchasing property for an investment portfolio is different to purchasing a property for a principal place of residence as you are looking at factors of return on investment (ROI) rather than focusing on lifestyle options. Working with an investment planning firm like National Investment can guide you through the range of options available, and secure a property that will help you towards your goals from day one.
Reports show that Sydney is currently facing a shortage in housing and in two years the situation is expected to change considerably. “With much of the pent up demand pressures having largely dissipated by this time, prices in Sydney are forecast to decline by up to four per cent over 2018/19 analysts predict.
Being prepared for changes in the market is an important part of creating an investment property strategy.
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