ALIC’s Mark Davis shares his opinion on Australian property markets from an investment perspective.
Before you start reading, keep in mind that all information contained on this page is either Mark’s personal opinion or information from third-party sources. None of this information represents the views of ALIC or related entities, nor is it investment or property advice. You should not make any financial or investment decisions based on this information.
If you need property advice, book a meeting with one of our brokers for a referral.
At ALIC, we help our clients create wealth through property – and that means making sure they’re investing in the right places.
To stay on top of the markets, we hold fortnightly meetings with some of Australia’s leading property experts.
Here’s what they told us.
Over the last three months, the cost to buy certain blue-chip properties in Melbourne and Sydney has been exceeded by their replacement costs – thanks to a string of builder collapses and rising material costs.
For example, if a high-end property costs $3.2 million to acquire, you might pay $4 million in replacement costs.
Why does that dynamic matter?
Because, as soon as interest rates experience downward pressure, many property advisers predict that those blue-chip markets will pick up drastically.
Personally, with three consecutive on-hold calls from the RBA, I’ve seen our clients’ cash flows starting to stabilise and become more consistent.
People are beginning to have a better understanding of their finances and the landscape they’re operating in – and that confidence could potentially lead to greater investment activity in high-opportunity markets.
(Property advisers we work with are currently recommending places like Toowoomba, Mandurah and Rockingham.)
If and when the RBA does decide to lower rates – CBA is predicting a drop in early 2024 – we could see increases in those markets to the tune of 20%.
Here are some of the locations we’ve seen property advisers recommend to our clients.
Don’t make financial decisions based on this information. Always seek the advice of a professional property adviser.
Rental demand has increased drastically across Australia over the past year – the only capital city that’s seen sluggish growth is Melbourne.
But, with supply continuing to tighten, it’s likely that Melbourne is on track to catch up with rental rates in the rest of the country.
So, what can investors do to maximise rental yields and cover their increased costs?
The most obvious step is to increase rent to match the rest of the market.
Many of our clients are also re-balancing their portfolios to combine lower-yield properties in capital cities with higher-yield regional assets.
For example, if someone owned properties in Sydney or Melbourne with a 3% yield, they might look to properties in regional Queensland or Western Australia with 5 or 6% yields to ease cash flow pressure – which is particularly important for investors with large debt.
Everyone in Australia is aware that construction costs – thanks to builder collapses, material prices, and labour constraints – are impacting the housing supply.
But many people still hold a misplaced faith that those costs will return to a pre-COVID baseline.
In my opinion, that’s not likely.
Supply and demand will continue to outstrip any minor reductions in prices, and, in all likelihood, we’ll see building costs actually go up as demand swells over the next few months.
The best we can hope for is the type of softening that we’re already experiencing – a deacceleration, not a reversal.
Know your cashflows and understand which properties you can and can’t afford to invest in. Your broker can help you calculate your borrowing power.
Speak to the right experts and develop a plan. Don’t borrow more just because you can – talk to your broker and property adviser about investments that will improve your financial position over time.
Then act on current market opportunities. Waiting for ultra-low interest rates to return is unlikely to bear fruit.
Mark answers frequently asked questions about property investment and lending.
Yes, most lenders do consider potential rent from an asset for which you’re seeking lending approval.
They typically conduct a valuation of a property to determine its probable rent, although some lenders might get a real estate appraisal instead.
Once they’ve determined the asset’s potential rental yields, they’ll factor 80% of that number into their calculations.
That’s the case for the vast majority – around 90% – of institutional lenders.
Second-tier lenders, which aren’t as heavily restricted by regulators, are more lenient and may include up to 100% of your potential rental yields.
Keep in mind that you can also borrow more money generally through second-tier lenders due to the way their servicing calculations work.
Many people like the idea of investing in A-grade or ‘blue-chip’ properties in places like Melbourne and Sydney, but it’s important to understand that more affordable properties in high-opportunity markets like Toowoomba or Mandurah are predicted to experience higher growth over the next few years.
Even though building costs are contributing to a large-scale demand issue – which is driving up the price of those blue-chip assets faster than might be expected under other conditions –investors still shouldn’t necessarily be jumping straight into blue-chip purchases.
If you buy a property that’s worth $3 million, you’ll need to pay around $200,000 in stamp duty.
You also need a large income to be able to comfortably service blue-chip Melbourne and Sydney properties, which is why I see many of the property advocates we work with advising their clients to release equity from currently held assets in markets that are starting to slump.
With that equity freed up, clients can reinvest in markets that are forecasted to grow quickly – places like Mandurah and Rockingham to the south of Perth.
Repeating that cycle of ‘buy low, sell high’ will increase clients’ net worths over time, which will allow them to eventually enter those blue-chip markets.
Importantly, they’ll be able to time their entry appropriately – and won’t be walking around trying to service a massive non-deductible home loan.
The RBA’s last three meetings have seen the cash rate unchanged – and there’s a possibility that we won’t see any more increases at all.
That means Australia’s housing markets will likely open up for investments.
Buyers will regain their confidence, and, as activity increases, we’ll see rental yields continuing to accelerate thanks to the ongoing supply-side issues.
Renters will continue to struggle – but, for investors, the October–December period could be highly appealing.
Book a consultation with Mark for personalised advice about borrowing – or, for Mark’s general opinion on markets, property, and the economy, submit a question and have it answered in the next Property Intelligence report.