Investors Expected to Flood Back to the Market

February 2010 - Author: Randolph Clements

Investor activity substantially increased as demand rose, interest rates reached historic lows, and competition from the first home buyer sector waned in the latter part of 2009. A severe housing shortage, one with no end in sight in the immediate future, will continue to fuel demand and be a driving force shaping the 2010 residential market. Here’s why:
Record levels of migration, combined with a baby boom, have the Australian population experiencing its biggest explosion in history. With more than 200 people per day, or almost 1500 per week, arriving in Melbourne and with a population growth rate of 2% per annum, Melbourne’s population is expected to hit 4 million by the end of the year. In addition, with interest rates on an upward trend and house prices rising, the resulting decline in affordability is expected to see more people priced out of the owner-occupier market, creating even greater demand for rental accommodation. Investors are in the box seat.
As with any other market, demand pushes prices upwards. Not only are house prices expected to continue to strengthen in 2010, making capital gain an attractive incentive, rental yields are on the up and up. Australian Property Monitors suggests that house rents will rise by 5.6% to an average of $380 in Melbourne in 2010. Unit rents are expected to rise by 7.5%, to an average rental of $360, with expectations of even higher growth in 2011.
Indicators for the investment sector are indeed promising: the economy has stabilised; increased demand is outstripping supply, creating record-low vacancy rates; the population’s demographics are favourable; rents are on the increase: and interest rates remain at below average levels.
While the prospects look very good, a word of caution: not all properties will perform well. Some suburbs will out-perform, while others will under-perform. The same goes for varying types of properties in those particular suburbs. Buy selectively. Well-informed investment decisions based on a good understanding of the market and sound advice from trusted experts is vital in the current market.
Investigate how property prices performed before, during and after economic downturns. A good place to start would be the 1987 recession. Note the suburbs and house types that bottomed out the most and those that rebounded the most. Understand the most price-sensitive areas and the more stable ones. Both types can build wealth, but over different time spans.

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