Whether you buy a property as an investment or a home, certain basic rules apply to ensure good capital gain.
Predictions that house price growth won’t run as hot next year as it has in the past 12 months could provide breathing space for home and investment buyers but it may also mean they shouldn’t count on capital growth to bail them out if they buy badly.
”We’ve come through a strong cycle, particularly in Melbourne,” says the head of property research at Macquarie Bank, Rod Cornish. ”But growth over the next 12 months will be significantly slower than last year.”
The impact will be greatest in Melbourne, he predicts, because of the triple whammy of slowing immigration, lots of new housing and the hit to affordability from price rises so far.
”Melbourne, for the first time ever, is less affordable than Sydney,” he says, referring to how much income is required to meet the cost of housing in each city.
In Sydney, slowing immigration will also affect demand but prices haven’t run so far, for so long, and housing starts are only just above 30-year lows, he says.
Cornish says it is always important to make sure you pay a sensible price for property ”but in an environment where prices are not rising strongly, that’s more so”.
”A rise in the market isn’t going to correct for you if you do pay more than it’s worth,” he says.
However, a property investment adviser, Monique Wakelin, says property is a seven- to 10-year ownership proposition for most people and over that time frame you should come out in front, even if you pay a slight premium.
That said, buying well does allow investors to maximise return and it will put owner-occupiers in a home that suits both their budget and their needs.
”With an investor, it comes down to one question – how much capital growth can I buy for my money?” Wakelin says. This requires an unemotional, objective assessment of a property’s prospects.
For owner-occupiers, where and what depends on how much accommodation they need and their budget for that. Their decisions will be much more subjective.
The trick is when clients want to combine the two, she says – buying a home but with an eye to capital gain.
In this case, she asks them to assign a weight to each of those goals, with the caveat that the ratio can’t be 50:50.
If the client’s tilt is at least 60 per cent towards it being an investment (and therefore only 40 per cent on the scale as a home purchase), she’ll start showing them properties that may not appeal to their personal taste but which Wakelin Property Advisory ranks as being of ”investment grade”.
To pass, a property must have a history of consistently producing capital growth above the market average, Wakelin says.
Only about 5 per cent of the properties on the market at any one time pass muster.
For Wakelin, properties that sit two kilometres to 15 kilometres from the CBD in Melbourne, or up to 20 kilometres in Sydney, get a tick.
Single-frontage houses built between the 1880s and 1940s are good, particularly if they have shops, transport, schools and healthcare nearby. Access to major roads is also good; being on a main road is bad.
Major renovation required? No thanks. Apartments without parking are out, as are those less than 45 square metres to 50 square metres in size. High-rise is out.
Charming older units – with one or two bedrooms – are better than new ones because an even newer one will make your development look a bit shabby in just a few years’ time.
Cornish says people no longer want the most expensive or biggest house in the suburb.
”Developers are tuning in with that theme, starting to have more affordable product that’s not so large, with not quite the same level of fittings – perceiving that affordability is going to be a point that purchasers will look for,” he says.
Having found the right property, the next step in buying well is paying the right price.
Obtain the price history of your targeted property, or a similar one nearby, going back between 10 years and 15 years, Wakelin advises.
”As long as the trajectory and the history of growth in that property justifies it, as long as all the attributes of an investment-grade property are present, you can afford to pay a slight premium,” Wakelin says.
And you’ll know what a ”slight premium” is only after you’ve completed your research with a couple of months on the auction and sale trail, seeing what’s selling for how much and why.
Perhaps surprisingly, property author and consumer advocate Neil Jenman doesn’t see much wrong with owner-occupiers paying slightly over the odds for the right property, either.
Allow for expenses such as stamp duty and legal costs, set something aside for any unexpected repairs and think about worst-case scenarios such as time off work, he says. But then buy a property where you’ll be happy.
”Most people buy houses with their hearts and you should – if your wallet is OK,” Jenman says.
”If you love a house and you’re going to live in it a long time, it doesn’t matter if you pay a bit more – if you can afford it.”
Still, he says you can save money if you’re prepared to sacrifice ”prestige” or proximity and buy in a less-trendy suburb or travel a bit further to work to lower your repayments.
- Don’t assume every property will rise in price.
- Buy with a seven- to 10-year horizon.
- If you’re an owner-occupier, buy what you need, not what you want.
- If you’re an investor, buy without emotion.
- Research prices and desirable features before shopping.