Should you invest in property in a down market?

Nerida Conisbee, Ray White Chief Economist

Investing in property has always been a popular way to build wealth in Australia but data on investor lending is now showing that investors are pulling back. After hitting a record high in March 2022 of $11.6 billion, investor lending has now declined by 20 per cent. With prices softening and rates rising, is now a good time to invest?

There are a number of considerations that need to be made whether it’s a good time:

1. Can you afford rising interest rates?

Rates have been rising quickly and at this point, it’s too early to say when they’ll start to stabilise. Since last year, banks have been required to factor in your ability to pay a loan three per cent higher than the current rate. Regardless, it makes sense to budget in more rate rises when looking at buying an investment property.

2. Can you get a loan?

The largest fall in house prices in recent history was in Sydney following the start of the Global Financial Crisis. A large driver of the decline was that banks were restricted as to how much they could lend. This isn’t the case now and with rising interest rates, providing mortgages is even more profitable for banks, making them keen to lend. Provided you can pay back the loan, you’re likely to be able to get a loan relatively easily.

3. Where are you looking to buy?

Not everywhere is seeing declines in prices and even in areas where prices have declined, these declines will end at some point. Meanwhile rents are still rising pretty much everywhere. Where and what you buy right now can lead to dramatically different investment outcomes even in the short term.

4. Are you looking for capital growth or rental yield?

It’s very rare to be able to get high capital growth and high rental yield. Suburbs that have high rental yields generally do not see much capital growth while high growth suburbs have low rental yields. Investors typically concentrate on capital growth, however, rental yield is equally as important, particularly if you’re looking to hold long term. Right now, we’re seeing low capital growth overall but strong growth in rents.

5. How long do you want to keep it?

Now is not a great time to house flip. During the pandemic, strong price growth meant it was profitable to buy and then sell quickly, even with transaction costs such as stamp duty factored in. With price increases slowing, and in some cases falling, it’s far less likely you can make a profit in a short amount of time. Holding long-term means that it matters less what part of the cycle you buy in.

6. What are your alternative investment options?

Property is often called “inflation proof”. This isn’t entirely true given how much property investors rely on debt to finance a purchase. However, it’s true that rental returns do provide a hedge against capital losses during a market downturn. Right now, investing in anything is risky. Shares are highly volatile, putting money in a term deposit yields very little return and alternative investments such as Bitcoin are seen as even higher risk than normal.