Despite growing pressures, property investors will once again be turning to bricks and mortar thanks to the volatility of global share markets and the ASX dropping to 2013 levels. However, they must tread carefully on the road ahead, as the opportunity to seize a bargain or ‘beat the market' could be costly without the right advice.
The key challenges for investors in 2016, according to ALIC's Mr Back, will include:
Ongoing foreign investment
With the Australian dollar at just over US$0.70, our market continues to be attractive to foreign investors, which means competition at auction will remain brisk.
This news comes despite changes to foreign investment laws last year, which sadly added up to little more than ‘extracting a few more coins from the ashtray’, doing little to materially dampen foreign investment or the purchase of owner-occupied properties.
Australian investors keen to avoid a bidding war (which they are unlikely to win) would be best served to turn to a buyers’ advocate and purchase properties well before they go to auction.
Oversupply of investment property
Given the number of cranes dominating the skylines of many of our capital cities, and the recent availability of secure but cheap finance, oversupply is set to be a major issue in coming years.
Those mostly affected will be investors and home owners buying off-the-plan properties, who will begin feeling the impact of their poor investment decisions in late 2016 and through 2017. Coupled with ASIC and APRA changes, this will place enormous pressure on rental yields and valuation prices at settlement time, with buyers needing to kick in additional money or equity at time of settlement.
Many buyers would be better off walking away from their deposit than being lumbered with a poor quality asset for the next 10 years.
Impact of APRA/ASIC regulatory changes
These major regulatory changes - such as changes to servicing sensitisation and the introduction of tiered interest rates which have tightened bank lending to property investors - will have a knock-on effect well into 2016.
Though it's good to ensure a safer environment for Australians to both invest and lend in, the changes will mean it is tougher for new and existing investors to expand their property portfolios, making it more difficult for self-funded retirees to grow their wealth and retain their independence.
Ironically, these changes come at a time when the government is facing a deluge of Australians entering retirement.
Tiered interest rates
The move last year by banks to a two-tiered interest rate structure saw many investor borrowers paying interest rates between 0.27 and 0.6 percentage points higher than those charged to owner-occupiers.
These additional costs are likely to be passed on to tenants rather than being borne by the investors in Victoria and New South Wales, but may see rents fall in Western Australia in a market that is already under pressure with the mining boom now over.
This will remain on the agenda as the Federal Government looks for pools of revenue to fund its $44B deficit.
Usually investors entering into a negative gearing arrangement expect the tax benefits, and the capital gain on the investment on disposal, to exceed the accumulated losses of holding the investment.
What the Federal Government will discover is negative gearing is not awash with the rivers of gold it had hoped. The reality is there are few people on the top marginal tax rate in a position to truly benefit from this property strategy. Also 70% of all investment property owners own just one investment property!
Changes to the negative gearing laws could have a harmful and far reaching effect on the entire property market - from buyers to sellers, developers and even those that rent. We could see the knock-on effect in the ancillary industries that supply the construction industry, resulting in the devaluation of the property market and a reduction in net wealth as pressure applied to the investor market begins to affect the over two million investment property owners in Australia.
It should not be forgotten that property has been a key strength in an economy facing challenging headwinds so absolutely needs to be in good shape to help secure our future.
Jason Back is managing director of the Australian Lending & Investment Centre (ALIC).