We’ve heard a lot of bad news in recent years. Now the mining boom is over our economy is more normalised. Some of the slack has been taken up by the extraordinary boom in property prices – and so the cycle continues (as my favourite economist, Don Stammer, would say).
Our economy has had a boom and bust cycle for a couple of centuries now. The extraordinary, uninterrupted growth since around 1993-4 has been unique in the world. But the cycle is back. What went boom for twenty or so years has now gone bust. Is that necessarily bad news?
So what next?
With so much cash in the economy – thanks to the $2.05 trillion (as of March 2015) in superannuation that all of us have been putting away and the mandated 9.5% annual growth – it is easy to see why.
Those funds need a home. With cash around the 3% mark (which means that returns after adjusting for inflation are really around 1%) you have a real cash boom.
Unsurprisingly this cash has found its way into the property market via cashed up investors – either investing in their own name or via their self managed super funds.
The good news…I’m getting to it.
With 60% of property buyers now investors there will be a glut of rental property on the market. Which means that investors that may have been getting a 5% yield will be faced with a much lower gross yield. Possibly a net yield in the threes. Which is really pretty much where the cash rate is.
So why invest in property. Two main reasons:
- Capital gains – something you won’t get from cash
- Tax deductibility of interest and all other expenses – resulting in either negative or positive gearing.
I wouldn’t be so bold as to call a peak of the property market but the Government (via APRA and the banks) is pulling levers to cool it. When Governments intervene they usually overdo things until the market has all but been killed off.
If you’re a buyer of your own home (owner occupied) – you’ve never had it so good. Because the ratio of owner occupied home buyers to investors has been skewed in favour of the latter recently, banks are now beginning to drop their rates to attract owner occupied buyers.
Rates for these buyers are as low as 3.99% but more usually around the 4.15-4.20% level. So whether you’re a first home buyer or already an owner – the rental market isn’t the only way to invest in housing.
With rates this low, existing owners can upgrade or renovate adding value to their homes. Sure interest isn’t deductible but with rates this low…
Remember that there is no Capital Gains Tax on your home.
So why wouldn’t you want to enjoy your investment.
This is not a dig at investors – I’m merely saying that the cycle appears to be turning. It may be time to adjust your focus. See, it’s not all bad news.