Crystal Wealth Newsroom
How the current property market is affecting your retirement plans
Stories about falling house prices are appearing with increasing regularity in our national media and, naturally, it does give some cause for concern to many people who are approaching retirement and have a wealth creation strategy built around property investment.
First and foremost, it is important to remember that the property market is cyclical, like all other investment assets, and the impact on you depends on what you need to do at a certain point in time.
What’s happening in the property market at present?
CoreLogic data recently reported that national housing prices (measured in aggregate across five capital cities) declined 7.99% over the year to 28 February 2019.
Sydney prices are down an average of 10.4%, closely followed by Melbourne down 9.1%.
Tighter lending criteria and weaker foreign demand has resulted in fewer buyers, meaning property is taking longer to sell as well – further exacerbating the problems for sellers to consider.
Continued house price falls in Sydney and Melbourne, in particular, have not yet compounded a broad-based economic slowdown, but overall growth (and consumer sentiment) has eased. In fact, certain areas of the country, such as Adelaide and Hobart, are still seeing property growth, but concerns remain that a broad-based slowdown could still occur.
The outlook across property sub-sectors is also varied. Quality office and industrial property are doing better than many retail sites (given weaker consumer spending), while there is concern over still-to-be-settled residential developments (particularly apartment projects). This underpins current weaker demand in this sector relative to the available supply of housing.
Taking practical property steps
If you have an investment property or properties, or are thinking of buying an investment property, we believe now is a time to tread very carefully. There is considerable uncertainty around Labor’s planned changes to negative gearing and capital gains tax from 1 January 2020 which are yet to be fully worked through. Remember the devil will always be in the detail!
But importantly don’t panic when you see yet another report of falling house prices in the press. It still depends on the specific property, the location and the dynamics in question.
Undoubtedly, though, prices are softer across the board.
While not our base case currently, if we do get a recession that triggers a rise in unemployment we could see sharper price falls in the investor market before it stabilises. There is even talk of a decline in excess of 30% in a deep recession.
The RBA recently commented that it was unusual for housing prices to fall significantly in an environment of low mortgage rates and lower unemployment rates, but this is coming off a large increase in housing prices over recent years, so it depends when you bought into the current housing cycle.
Undoubtedly the decline in the cost of money and low inflation has allowed the economy to service a higher debt level, including helping households maintain mortgage payments.
The tricky part here is if you need access to money in the next year or two. With the prospect of further falls still possible there is no guarantee prices will be better within this timeframe. So make sure you talk to your adviser about the best long-term strategy for accessing funds if needed – keeping in mind that property is a cyclical investment asset.
Investing in property in 2019
Some property exposure is sound as part of a diversified portfolio, as it is an asset not subject to the daily fluctuation and ‘noise’ of share markets.
But the vast majority of people already have a large exposure to property because they own the family home (or are in the process of doing so). Hence it’s wise to be mindful about how much more domestic property exposure you want. And also what type of property (residential, commercial, etc.) fits the portfolio need.
Remember too that if you hold a large bank share portfolio, plus retailers, consumer staples, and listed REITs, you already have a large exposure to the domestic residential property market in one way or another, so be careful about loading up with more.
If you do want to invest in property now, make sure you understand the investment return profile you expect to see. This means assessing the income (rental) yield as a starting point. In the current market, ‘off-the-plan’ property purchases are unlikely to be an instant money spinner so evaluate the planned project carefully. As a guide, cost out your ability to still service any loan if you must hold the property on an interest rate of at least 2% above prevailing rates for affordability. Banks will use a minimum serviceability test currently of 7.25% pa so make sure you can get the loan you think you need first!
It’s imperative, if and when you do invest in property, to do the right financial modelling.
For example, if your property doubled in value over ten years, it means an annual rate of return before costs of around 7% p.a. And, if negatively geared, by definition it costs you money each year AFTER tax, so this would eat into your return further (before considering increased capital gains tax under a Labor Government) to make the investment worthwhile. So a lot needs to go according to plan to make the property work well in a portfolio.
If you have any concerns about your current exposure to the property market, and how it may impact your retirement plans, please don’t hesitate to talk with us. Every individual’s position is different, but by working closely with your adviser, we can help minimise any negatives to keep your wealth creation strategy on course.