The rapid increase in Sydney property prices has left some would-be property owners catching their breath.
Some potential first-time buyers have found themselves already left out of the running with prices rising faster than their ability to save a decent deposit.
This situation is starting to result in a sharp uptick in the numbers of people opting to become ‘rentvesters‘ – that is, renting in one location and buying in another.
This trend is not entirely new, with an influx of investors opting for this strategy over recent years given higher property prices in markets such as Sydney.
Indeed, according to the 2020 PIPA Annual Investor Sentiment Survey, about 60 per cent of investors would consider rentvesting as a property investment strategy.
The survey also found that the number of first-time buyers who choose to rentvest was increasing, with 44 per cent of first-time investors continuing to rent while buying elsewhere last year – an increase from 34 per cent the previous year.
Challenging times for Harbour City property buyers
Even before the current strong market conditions, Sydney was one of the most competitive property markets in the world with more demand than supply the usual state of play.
This means young people, in particular, have long struggled to gain a foothold in their local property markets, especially in high-demand locations like inner-city suburbs.
With Sydney property prices firmly quickly, many young buyers are already being priced out of their preferred suburbs.
Some buyers are editing their search parameters to improve their chances of securing a property, but the speed of the market is such that they are often priced out of even their secondary choices.
This has resulted in a spike in enquiry from young people who want to invest and are prepared to think outside of the square to make their money work for them – somewhere else.
Lifestyle considerations
One of the main reasons why rentvesting has been growing in popularity is because it enables people to live where they prefer, instead of making massive lifestyle sacrifices to own their own piece of Sydney real estate.
Many buyers may be able to afford their own home if they are willing to move to the outer ring or generally be miserable in something tiny somewhere, but that does not fly with many young people – and nor should it.
That’s because they can usually easily afford to rent in the blue-chip, inner-ring areas of the eastern suburbs, inner-west or the Lower North Shore even if they can’t afford to buy a property there.
They also don’t necessarily want to sacrifice the many conveniences these locations offer, including shorter commuting times to work, being near entertainment precincts, restaurants, and beaches as well as being close to friends and family.
That’s why rentvesting is so popular, because it allows young people to live where they want while investing their dollars in real estate elsewhere.
The benefits of rentvesting
Rentvesting can really be like having your property cake and eating it, too. In fact, there are a number of benefits of adopting this property investment strategy, including:
Renting where you want to live but continuing to live your best life in a location of your choosing and preference.
Low rental yields in inner Sydney means that by renting you can afford to live somewhere that you could not afford to buy into yourself.
Rentvesting enables young, and young at heart, people to remain agile and mobile.
The strategy means that people can still build wealth through property – they just don’t have to be owner-occupiers.
Higher yields in other affordable areas may mean the investment property doesn’t cost much to hold.
Buying in more affordable locations also creates the opportunity to purchase multiple properties or build a small portfolio over time.
What are the risks?
Like any property investment strategy, there are pros and cons to rentvesting.
The strategy may not suit some people simply because of their risk profiles or they are unaware of the best locations to buy outside of their personal property neck of the woods.
Some other risks of rentvesting include:
Being a homeowner is a dream of most people, but rentvesting will not provide the same emotional benefit of owning your own home or having a principal place of residence.
Renting over the long-term means you may have to move more often, because you are at the whim of your landlord, who can increase the rent or sell the property.
Unlike your principal place of residence, which is free from personal tax, you will need to pay Capital Gains Tax on your investment properties, which can eat into profits.
First home owners’ grants, and programs of their like, are usually only valid for owner-occupiers and not first-time investors.
Like most property investment strategies, once you commit to a rentvesting strategy, you need to stick to it over the medium to long term because changing your mind could mean selling too soon and not realising any price uplift.
Property investment can carry significant downsides generally, so do you need to fully understand all of the risks and preferably work with experts to guide you.
Not all properties appreciate, which means that you need to buy the right property in the right location at the right time for the right price. Inferior properties in inferior locations may not deliver any capital growth – and you could wind up financially worse off than before.
Buying property on behalf of clients is a complex business that requires the utmost care. We are assisting in one of life’s most significant financial transactions, so it’s crucial we help them make well-informed decisions.
And the challenges are multiple. From helping clients define their needs and balance expectations with budgets, through to sourcing properties and conducting due diligence on everything from town planning to nearby infrastructure proposals.
However, in recent months, buyers and their agents have been thrown an additional curveball that’s compounded the degree of difficulty when it comes to purchasing real estate.
In markets, like the present one, where prices are rising quickly week on week, how do you keep up with what things are worth?
It was a subject we tackled in our March 9 episode of TheProperty Planner, Buyer and Professor podcast where David Johnston, Peter Koulizos and I discussed the problem and floated solutions.
The data challenge
One of the most essential tools in a property buyers utility belt is good comparable sales evidence.
Reliable sales evidence is the linchpin to accurately assessing market value. It is foundational information in determining how much is enough (or too much) to pay for a particular property.
Good comparable evidence comprises a number of characteristics which you compare with your potential purchase – or, as it’s known, your ‘subject’ property.
Sales evidence should be as similar as possible to the subject physically. The evidence should also be in close proximity to the subject, so it benefits from access to the same services and facilities.
Sales evidence should also be as recent as possible to ensure it reflects current market conditions.
Last, but not least, a good comparable transaction should fall within the definition of market value.
That is, it should be a price attained between a willing buyer and a willing seller in an arm’s length transaction where neither are so eager to trade as to overlook reasonable financial considerations. For example, a sale between a parent and their child might not be good evidence if the parents gave their offspring a discount price.
When prices are relatively stable over long periods, sales evidence – even if it’s a little older than you’d like it to be – provides a reliable indication of a subject property’s value.
But the current hot property market has created conditions which have made the use of normally reliable sales evidence risky.
A testing time
During our podcast chat, Peter pointed out two reasons why normal sales evidence has become less reliable.
Firstly, confirmed sales information is not timely enough for this fast-moving market.
As Peter said, in the normal course of events a buyer and seller agree on a price and sign a contract.
Then, in most instances, there’s a 30-day settlement period so the buyer can complete enquiries – such as building and pest inspections – and arrange their finance. In fact 60-day, and even 90-day, settlements are common.
Then, once settled, the sale needs to be registered and processed with the relevant authorities before it is recorded and confirmed as part of the public record. It is then considered reliable as a comparison.
But all this process means the time period between the agreed sale price and the transaction’s final registration can be three-to-six months.
When trying to assess the value of a property in a market where new price benchmarks are being set week after week, using sales evidence that is three or more months old is almost useless. By the time it’s on the record, the market has already shifted up a gear.
The second challenge in this market is that buyers are so desperate, they’re ignoring ‘the rules’ of market value. Peter, David and I have all seen buyers taking extraordinary steps to beat out their competition. Many are making offers well in excess of current value – and it’s frightening to those of us who understand the market.
Of course, each overpriced sale just drives prices higher as under-informed buyers continue to become more desperate in a bid to outdo each other.
The challenge is real and dangerous. Overpaying for property during a hot market can result in an extraordinarily risky outcome. When the market turns – and history tells us it will at some stage – overextended buyers can be in real strife.
The remedy
There are several strategies and solutions to help overcome data lag in hot markets.
Firstly – stay up to date with sales by drawing on information from agents and auctions. As a buyers’ agent, I attend auction events multiple times a week, and I talk to selling agents daily. This keeps me at the front of the price wave. I know my clients will likely have to pay a premium to secure a property, but I also know where the safe ‘tipping point’ is. Finding this walk-away price is crucial in avoiding potential financial disaster.
Secondly, understand as much as possible about market conditions now and in the future. If you have older sales evidence, but also understand how the market has changed in recent weeks, you can make reasonable allowances for price movements when running comparisons.
Our final solution requires the government to step up. As we discussed on the podcast, in this day and age it’s confounding that the process of approving and publishing property sales information takes three months. Surely this could be sped up? Perhaps early registration of sale details as ‘pending’ would assist. If the government really is concerned about runaway price growth, having a well-informed buyer pool is part of the solution.
In hot markets, staying up to date with values takes extra effort. The consequences of getting it wrong are that you might miss out on the property your desire. At worst, however, it can see you pay far too much for an asset and risk a future financial loss.
Property expert, Terry Ryder, reveals why Brisbane and South-East Queensland are the locations to watch – and it’s not just because of the 2032 Olympics.
Buying in Brisbane has suddenly become top of mind for real estate consumers, influenced by confirmation of the 2032 Olympics.
But Brisbane was already one of Australia’s rising markets. The Olympics decision simply adds another layer to Brisbane’s growing credentials as the place to own real estate.
Firstly, what does the Olympics decision mean? The answer is 10 years of intense investment and premium growth – not just for Brisbane but for South-East Queensland (SEQ) real estate generally and other parts of the state as well.
Confirmation that Brisbane, the Gold Coast, and the Sunshine Coast will be the 2032 hosts is an undeniable game-changer for the economies and property markets of SEQ.
Property prices and rents are already rising across SEQ but the Olympics announcement will turbocharge markets throughout the region.
Spending on major new infrastructure has been pivotal in generating economic activity, jobs, and real estate demand in SEQ in the past year – and the prospect of hosting the Olympics in 10 years’ time will generate an elevated program of investment and development.
The real estate industry tends to spruik a property boom after a major event like the Olympics but all the evidence suggests that the greatest impact for property markets occurs in the lead-up to the event, not in the aftermath.
The Sydney Olympics in 2000 and the Commonwealth Games on the Gold Coast in 2018 provide templates for how these big events can impact local economies and property markets.
The years leading up to the 2018 Commonwealth Games on the Gold Coast saw increased real estate activity, thanks to the rising levels of construction of infrastructure and facilities, the jobs this generated, and the consequent demand for real estate accommodation.
There were similar outcomes around the 2000 Olympics in Sydney.
The Olympics announcement also creates increased media focus on the SEQ region and the affordable lifestyle it offers. And it starts now – and will extend over the next 10 years.
A state government analysis suggested that the 21 July announcement by the International Olympic Committee alone generated publicity and profile for Brisbane and Queensland that was worth $170 million.
Property prices and Olympic Games host cities
PIPA chairman, Peter Koulizos, has commented on what the 2032 Olympic Games may mean for the Brisbane property market.
“Research shows that residential property prices do perform better as a result of an Olympic Games,” he said. “A study on six host cities, from Los Angeles in 1984 to Sydney in 2000, suggests that the impact on the economy and residential property prices is not even. It depends on the planning and the scale of the Olympic investment.
“Research on the London Olympics showed that areas close to Olympic facilities increased in value by 2% to 5% higher than other areas.
“An investigation on the impact of the Sydney Olympics on the residential property market found that the markets of host suburbs experienced substantially higher growth during the bidding and pre-Olympic periods, but not after the Olympics were held.
“PIPA has conducted research into Sydney’s residential property prices pre- and post-Olympics that shows that from the time the announcement was made in September 1993 to the Olympics being held, Sydney was one of the best performing capital cities. However, post-Olympics, the rate of growth decreased significantly.
“Based on our research and analysis, it is obvious that Brisbane and SEQ will benefit from hosting the Olympic Games.
“However, the benefits will vary depending on the location of Olympic facilities and the new infrastructure to be built, especially infrastructure that will better link the Sunshine Coast and Gold Coast to Brisbane.”
Things were already looking good
Keep in mind that the markets most impacted – Brisbane, the Sunshine Coast, and the Gold Coast – were already in the ascendancy pre-announcement.
The rise in sales activity in Brisbane since late 2020 has been exponential. Markets right across the Greater Brisbane area were recording sales volumes not seen in more than a decade. This was translating into big growth in median house prices, with some of the million-dollar suburbs rising more than 20% and some suburbs in middle- and outer-ring areas increasing 10%-15%.
More people are moving to Queensland
The official population data shows that Queensland, particularly SEQ, is by far the biggest beneficiary of internal migration (people relocating from one part of Australia to another).
In simple terms, people are leaving Sydney and Melbourne in significant numbers and moving to the smaller cities and to regional Australia.
SEQ is the number one target because it offers what these internal migrants are seeking – a more relaxed lifestyle at an affordable price. This part of Australia also scores highly on its successful control of the pandemic, particularly in comparison to Sydney and Melbourne.
The Gold Coast has been particularly targeted by big-city residents fed up with the long and repeated lockdowns. It has also been targeted by expat Aussies escaping coronavirus hotspots overseas and seeking real estate hotspots in Australia.
The Sunshine Coast has been on an irresistible growth path for the past three years, helped by a $20 billion infrastructure program. Just when its market appeared to be tapering after very strong price growth, the Olympics decision has come along to create a second wave of buyer interest.
Australia’s property boom is resulting in people joining forces with others to buy and invest. Here’s what you should know.
Soaring property values are prompting a growing number of Australians to team up with friends and family members to buy real estate.
Parents have been helping children into property for generations, but more creative pairings have become increasingly common, say real estate specialists, but they warn there are potential pitfalls.
Buyers agent Michelle May is seeing the trend among investors, multi-generational families, and first home buyers.
“It’s a pretty tough time to get your first foot on the property ladder, which is why in some instances, buying with someone else is a great strategy,” she says.
May says people who are open to exploring this option can consult a team of experts to ensure the process works for everyone involved – think mortgage brokers, buyer’s agents, conveyancers and lawyers.
“Perhaps you and your partner have another couple you want to team up with or a colleague looking for an investment,” she says.
“Two friends could decide to buy together and split the equity. But with property buying already a pretty stressful and emotional process, things can get complicated with multiple parties involved.”
The benefits may outweigh the negatives and allow people to buy somewhere they previously couldn’t consider, provide more borrowing power and share running expenses and financial impact, May says.
Property Investment Professionals of Australia chairman Peter Koulizos says “50 per cent of something is better than 100 per cent of nothing” and he is seeing more friends buy together.
“But you have to be careful how you get into these deals because you want to make it relatively simple to get out,” he says.
While spouses typically hold investment properties as joint tenants, where if one passes away the other gets the property, other investment partners can use a joint tenant structure – where each owner has a separate interest – or a unit trust with only two units.
Koulizos recommends having written documentation about how the arrangement works and ends, perhaps with a five-year time frame before one partner can buy the other’s share.
“You need to work out your exit strategy before you enter into the agreement,” he says.
“Friends and relatives don’t necessarily make great business partners – they can be lovely to be around but may make poor business decisions or are not very good with money.”
Australia’s big, brash boom-and-bust property markets tend to grab the attention of investors, but quietly consistent Adelaide is now deservedly getting its time in the sun.
New Domain research recently found the city was the only state capital – apart from Hobart – that had not a single suburb where rents fell in the past five years.
Meanwhile, a report from the University of Adelaide’s school of architecture and built environment has just revealed that, of the past two downturns in the economy, prices dipped in Adelaide by only 0.2 per cent in 2012, and then actually rose in 2019 by 0.4 per cent; the only state capital where prices didn’t fall.
“It’s amazing that in one of the worst bust years, Adelaide prices stayed positive, whereas the other capital cities all had drops,” said the report’s author Peter Koulizos, program director of the Master of Property and chairman of the Property Investment Professionals of Australia.
“It’s a very stable market, and COVID-19 has turned it into an even more attractive proposition as so many people are relocating from the bigger cities to the regional areas and smaller capital cities. I spoke to someone the other day whose son worked in Sydney who’s now moved back to Adelaide, working remotely on a Sydney wage but on Adelaide expenses.”
Investors can see the demand for rental homes is now strong, from the vacancy rate that’s been squeezed over the past year from 0.9 per cent to the current 0.6 per cent, on Domain figures.
By the same token, house rents have risen 8.9 per cent over the same period to a record weekly rent of $430, and units are up 9.4 per cent to $350.
But desperate renters are often still prepared to pay more to find a home.
Koulizos has heard of some offering $450 instead of the advertised rent of $420.
Bronte Manuel, sales partner of agency Toop + Toop, is now dealing regularly with large numbers of investors.
“We’re getting significant interest in Adelaide now from investors,” he said.
“Rental prices have never been this strong before and over the past 12 months – because all the figures stack up – we’ve had double or triple the number of investors looking to buy.”
House prices have also grown over the past year by a handsome 16.3 per cent, delivering investors the promise of capital growth too, although units have risen only 2.3 per cent.
At the same time, Adelaide still offers a very affordable proposition for investors with a median house price of $629,728 – the second cheapest of all capital cities behind Perth and less than half of Sydney’s median of $1,410,133 and just 61 per cent of Melbourne’s $1,022,927.
Its unit price is also rock bottom at $337,932.
“We’re now putting all our auctions online and, typically, around half of our properties are being purchased by interstate buyers, whether seen or not,” said Kate Smith, of Harcourts Smith.
“We’re seeing investors buying property at both the more affordable end of the market and the luxury end.
“They see it as a good-value proposition across the whole range.”
The biggest secret in Australian property investment could be in the heart of one of our biggest cities, according to a report published by a major Big Four bank.
A study by NAB has singled out where it might be better to buy than to rent, and suggested that the inner Melbourne suburbs of Carlton, Docklands and the CBD could be among the best places to buy property in Australia, both for owner-occupiers and investors.
CBDs have been emptying in Australia since the pandemic, as workers are no longer required to go into a physical office, while vacancy rates in Sydney and Melbourne have soared due to a lack of international students.
However, as the nature of work changes and CBDs become more multi-use, and international student inevitably return after the pandemic, it is likely that inner city rental markets will recover from their current slump and become highly profitable again.
Currently, there are houses are available in Carlton for less than $1m, unthinkable in Sydney.
“I would recommend for people to buy in the CBD, but not a brand new apartment,” said Peter Koulizos, CEO of the Property Investment Professionals of Australia (PIPA).
“There are still a number of small, character, period-style cottages in the CBD. But even an inner city suburbs like Carlton is a great spot, because there is a much higher concentration of lovely homes, walking distance to the city and plenty of demand from the university students that attend the campuses there.”
“In the city or close to the city, provided you’re buying the right type of property, can be a very good investment strategy.”
In Sydney, NAB recommended that those looking to buy units in Sydney buy further out. Koulizos put that down to the differing geographies of Sydney and Melbourne.
“West and Southwest Sydney are big employment hubs. It’s the engine for the Australian economy, not just the New South Wales economy. Living further out in Sydney is not such a bad strategy because there are such large employment hubs.”
“In Melbourne, that’s not the case to the same extent. You don’t have the large expanse of metropolitan area in Melbourne as you do in Sydney.”
“Also, Sydney being the largest metropolis in Australia, and having the Harbour, makes property prices much more expensive than they are in Melbourne.”
“Therefore, relatively, it’s more affordable to live close to the city in Melbourne than it is in Sydney. I wouldn’t be buying high rise apartments, but the opportunity to buy something on its own block of land.”
“Not only are you in a location that is highly sought after in terms of real estate, but the rezoning opportunities are far greater in the CBD than in the suburbs. What used to be zoned double story at most, as there is more pressure for housing and commerce, can easily change to multistory.”
“That can be huge, so far as the investor is concerned, because it goes from two story to maybe ten story. I wouldn’t be discouraging people from buying character or period-style homes in the CBDs of Australia’s capital cities.”
