Weighing up the property boom: What does it mean for investors

Property prices in Australia and overseas are booming. So, what’s causing the price surge and is it really good news for property investors?

What’s happening to the property market?

Across Australia residential property prices have skyrocketed, thanks to pent-up demand, record low interest rates and ready access to mortgage finance. Median house prices in metropolitan and regional areas have surged, and that trend is set to continue as owner occupiers and investors compete for limited stock.

National dwelling values rose by an average 2.8% in March, the fastest monthly gain since October 1988, according to property data group CoreLogic. This followed price rises in every capital city. But what’s happening in the property market here is actually being replicated right around the world, for precisely the same reasons.

Data from the Organization for Economic Cooperation and Development shows housing prices in 37 developed countries have risen at their fastest pace in almost 20 years. The United States, China, Canada, New Zealand, South Korea, and much of Europe, are all heading into new territory in terms of property prices. Parts of the Chinese property market have risen around 16% over the last year, while prices in New Zealand have jumped more than 20% since the start of 2020. And it’s a situation that central banks and financial regulators are monitoring very closely.

Although any rises in official interest rates are almost certainly off the cards for some time, some regulators may impose tighter controls on lending. While they’re unlikely to intervene in any way at this stage and disrupt the pace of economic recovery, a general concern is that if property markets become too overheated that could create stronger inflationary pressures. This would ultimately lead to higher rates, which is behind the market sentiment that’s currently driving longer-term government bond yields higher.

In its March monetary policy minutes, the Reserve Bank of Australia’s board members had noted that housing market conditions warranted close monitoring in the period ahead.

“In particular, it was important that lending standards remain sound in an environment of rising housing prices and low interest rates.”

The Australian Prudential Regulation Authority (APRA) is also monitoring the market, but says there is no cause for immediate alarm.

What does this mean for Australian property investors?

Australian economists and other property market forecasters are predicting that house prices will continue to gain ground over 2021. The same may not be the case for apartment prices, particularly in Melbourne and Sydney where there is an oversupply of existing properties and more new apartments are under construction.

For property investors, there are a wide range of factors to consider. Although residential prices are gaining broadly, property price growth is never uniform and capital returns vary considerably across cities and regions, by location, by property type, and based on an individual property’s physical condition.

On a rental income level, current market conditions remain fickle. The impacts of COVID-19 during 2020, including a rise in unemployment levels, resulted in governments enacting legislation enabling severely affected tenants to seek rent reductions and payment deferrals. As a result, many property owners are still contending with lower rental income and, in some cases, have needed to seek mortgage payment relief from their lenders.

Rental demand also has weakened due to the departure of temporary residents as a result of COVID-19, most notably foreign university students. This will be further exacerbated with net overseas migration to Australia expected to remain negative into 2022.

The outlook for interest rates

On a monetary policy level, the RBA has made it clear that, like most other central banks, it is unlikely to raise official interest rates for several years. That’s because neither wages, or inflation are rising fast enough to warrant a rate rise to dampen consumer sentiment at this stage, and especially with unemployment rates still elevated.

Yet, investing into property should generally be considered a long-term strategy. So, even though rates are at record lows now, there’s every likelihood they will rise over the medium term. This should be factored into your future capacity to service borrowings.

Assessing your investment goals

Whether you already own investment property or are considering an investment into direct property for the first time, it’s vital to see how property fits in with your overall investment goals.

What is your overall strategy with owning property and your investment time frame?

It’s also important to understand that property is an illiquid asset. Unlike assets that are highly liquid and can be readily sold on financial markets, either as a whole or in smaller quantities, generally the only way to realise capital growth from an investment property is to sell it. The only exception is when it’s possible to sub-divide land and sell off part of a property.

Plus, keep in mind that there are substantial entry costs into property, such as stamp duty and other ongoing government charges including rates and land tax, mortgage interest charges, property management fees, insurance, and maintenance or repair costs.

Selling a property involves marketing and agent’s fees, and potentially capital gains tax. Property expenses compare with the low operating costs of buying and holding financial investments such as exchange traded funds (ETFs) and managed funds.

In addition, as noted above, property rental income cannot be guaranteed. That should be a consideration at any time given that property tenants are generally transient, and invariably there will be periods when your investment is not earning income.

Furthermore, like other investments, owning property is not an instant pathway to gains. As past episodes have shown, such as during the Global Financial Crisis, there will be periods when property prices decline, and sometimes quite sharply. So, it’s essential to weigh up both the pros and cons of buying residential property purely on an investment basis.


Lowest interest rates for 1-year fixed home loans

The comparison table below displays some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

The comparison table below displays some of the 3 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

The comparison tables below displays some of the 5 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.


Thanks for visiting Canstar, Australia’s biggest financial comparison site*

→ Looking for more ways to create wealth? Learn more about Online Share Trading, Exchange Traded Funds and Cryptocurrency.

You can also compare health insurancecredit cards and life insurance and home loans with Canstar.


Tony Kaye

About Tony Kaye

Tony Kaye is a Senior Personal Finance Writer at Vanguard. He was a former manager at Standard & Poor’s Ratings and has a regular column in the Australian’s Wealth section. Tony has also written for newspapers nationally; The Telegraph, The Herald-Sun, The Advertiser, The Courier-Mail, NT News, Canberra Times and more. He has a Bachelor of Arts and Journalism at Curtin University and Public Relations at RMIT University.

Follow him on LinkedIn.