Investing in residential property is all about capital growth as opposed to income.
Residential property is a very popular investment in Australia due to the generous tax concessions available. This allows people to obtain a tax deduction and in turn provides a tax refund to the property owner.
Residential Property is a tax driven investment for many. This is not necessarily a bad thing but you also need to be aware of the factors that will affect the overall return on property.
First assuming that the property is a tax driven investment then negative gearing is the key here. This when the income is less than the expenses and depreciation to effectively give you a loss. The loss offsets some of your PAYG income and provides you a nice tax return.
The fact you are incurring an income loss needs to be offset by capital gains. What is important is that you make sure that the property will provide you a capital gain in the time frame that you will require it.
This is when you need to start looking at what factors in our economy affect the growth in property prices. Do not be fooled by the old saying property only goes up. There is another saying about a fool and his money.
- Unemployment is high and expected to continue to increase.
- Bank lending has been tightened since the GFC. We are now just starting to hear calls to loosen lending restrictions.
- Property values had a high level of growth between 2001 and 2007. However, since 2007 they have fallen back to 2004 levels. Historically they are still high.
- Affordability levels are at an all time low. The reason being, property values have increased faster than the earnings of individuals.
The growth in prices of property in Australia in the past 12-months has moved up 10%. And since 2007 has been the fast growing price of all Anglo countries.
When we compare this to the average disposable income per Australian Family we note that the house prices are now around 4.5 times average disposal income.
Up until 2000 it was around 3 times. This is a 50% increase in the past 14 years. This leads to the fact that less Australians are now able to afford to buy property.
The property market has seen strong growth from the investors. Some of this is due to government programs while others due to the level of rents increasing producing better overall returns.
What all of this means is that less people are able to afford property which means less people looking to buy and less buyers generally means lower prices.
In the current market caution is the key when investing in property.
Make sure you do your research.