Lots of clients have asked us… ‘what does the end of the First Home Owner’s Grant means to property investors?’
Firstly, its important to understand what impact the FHOG had on the market since it was introduced. The FHOG was introduced to provide stimulus to the housing market to maintain confidence in the face of the GFC but all the positive press would leave many people surprised to find out that only 66,000 people have taken advantage of the grant. When you look at this compared to a shortfall of 180,000 properties across the country, its easy to see why rental properties still remain in undersupply. In fact, with ‘market balance’ being a 3% vacancy rate, many markets around Australia remain below 2% (with the worst below 1.5%) thus highlighting the limited impact of FHOG on reducing the demand for rentals as people moved out of the rental market and into home ownership.
When the FHOG comes to an end on September 30th, what we are still left with is a sizeable undersupply and that’s where the opportunities lie for a keen investor. To further clear the ‘fog’, let’s look at the property investment market. Interest rates are at historical lows but are likely to rise in 2010 (maybe even by December) but are likely to remain lower than the highs of the last two years. Note: we’re currently recommending our clients factor in a 1.5% rise over the next 18 months to be on the safe side when doing their projections.
With the low cost of funds and pent up demand in both property availability (a driver of capital growth) and rental availability (a driver of improving rents and lower vacancy) coupled with FHOG buyers leaving the market, what now presents itself is a unique opportunity for property investors. That said, we suggest you should ideally avoid the ‘first home owner’ favoured areas anyway as we could see some mortgage stress there as rates rise, potentially having a negative impact on returns and capital growth.
So given the current climate, property investors can, with the right knowledge, secure quality opportunities of cash flow positive (or close to) properties in high growth areas. In the words of John Edwards (CEO of Residex) this week ‘ … based on what I see, there is likely to be a short period of growth followed by increasing rental yields. This presents a unique positive investment environment where immediate equity build up is possible and positive gearing will result in a relatively short time frame. If I am incorrect then we effectively have had a bet both ways as properties will simply grow in value until the new unaffordability level is reached. If we are selective in the areas where we invest then even if interest rate increases cause problems then we will be insulated to a large extent’
So, all that you need to clear the ‘fog’ is quality education, sound research and opportunity … what are you waiting for?!