Hint: Tip #6 is to go after Melbourne CBD apartments but avoid houses. Here’s why…
Property investment is an attractive proposition for many reasons. Unlike stocks and shares, it’s a fairly stable investment that doesn’t experience short-term flux. You can often rely on your property to gain value. Plus, you’re very unlikely to lose all of your money due to changes in the market.
There’s less risk involved. But that doesn’t mean that there’s no risk at all.
Investing in property without conducting thorough research beforehand can leave you in a bad position. A poorly-researched choice can still cost you thousands of dollars. You may not be able to generate a rental yield from the property. Or, you may buy in a stagnant region that experiences little capital growth.
Typically, these issues arise because investors don’t know what they’re investing in. They buy properties that aren’t suitable for a region’s demand, or they overpay for a property that doesn’t suit their needs.
Other investors commit to an off-the-plan property, but get stung when their circumstances change.
That’s exactly what happened to Melbourne-based investor Joan Carville.
Case Study – Joan Carville’s Off-the-Plan Blunder
At first, it seemed like a great opportunity.
Joan Carville saw investing as a way for her to build a nest egg for her retirement. She planned on starting small. A simple studio apartment in Melbourne fit the bill perfectly.
After speaking to her financial advisor, she made a decision. Carville placed a deposit on an off-the-plan studio apartment in 2009. At the time, she believed her financial planner’s advice about how the market would make it easy to rent the apartment out.
She just needed to wait for two years for construction to end.
But once 2011 rolled around, she found herself with a major problem.
A Changing Market
When Carville paid her 10% deposit, the Melbourne market was ripe for the type of apartment that she bought.
But she didn’t look ahead.
After two years, the landscape had changed drastically. Melbourne had a glut of apartments available for buyers and tenants. Moreover, lenders had tightened their criteria. She could no longer access the loan that she needed to complete the purchase.
Carville had already paid a $37,500 deposit on the $375,000 apartment. She’d assumed that the loan she needed would still be there once construction ended.
Instead, her lender told her that she now needed a 20% deposit to get the loan. That meant that she had to find another $37,500 or she’d lose the apartment.
The End Result
Unfortunately, Carville’s tale doesn’t have the happiest of endings.
Despite a lot of effort, she wasn’t able to raise the extra money for the larger deposit. On top of that, the apartment’s developer wasn’t willing to negotiate. They just put more pressure on her to settle the purchase.
Ultimately we advised her to cut her losses and walk away.
By the end of the entire process, Carville lost $51,000 with no property to show for it. She’d lost her initial deposit and spent $14,000 on legal fees.
On the bright side, Carville came away from the experience bruised, but not defeated. She brushed herself off and looked to invest elsewhere.
Thanks to our advice, she now owns an apartment in Sydney that’s enjoyed a capital gain of $150,000 since she bought it.
She offers some final nuggets of advice for anybody in her position:
- Avoid buying off-the-plan unless you’re willing to lose your deposit should your circumstances change.
- Research your financial advisor to ensure you’re getting advice that serves your needs.
- Do your due diligence on any property that you buy and any loan that you try to take out.
Buying in Melbourne – The Tips
The above took place in 2011, which means the Melbourne market has changed since that time. You need to know what to look for if you want to invest in the city today.
Here are the Performance Data tips that may help you to succeed with a Melbourne-based investment.
Tip #1 – Be Wary of the House Market
Currently, our data suggests that the Melbourne house market is reaching the end of an extended growth period. It’s likely that the prices of houses will fall in the coming months.
In fact, we’ve already seen this occur during 2018. And some analysts believe that the price of houses will fall by another 5% before the end of the year.
This is potentially bad news for those who already own an investment property in the city. Those that don’t may want to reconsider making a purchase just yet. There are very few indicators that the city’s house values will enjoy growth in the foreseeable future. At best, house prices will see limited growth. But the current view among many is that prices will fall.
For now, it may be best to take a wait and see approach with houses in Melbourne. It’s possible that house values will eventually bottom out before they start rising again.
Tip #2 – Understand the Current Demand
Understanding demand is a crucial aspect of any property investment. If you don’t know where the tenant market is and what it wants, you may make a poor decision.
Thankfully, demand in Melbourne is currently quite strong. The city’s population grew by 2.7% during 2016. Almost 75,000 migrants arrived in the state of Victoria during that period. Current projections estimate that a further 97,720 migrants moved to the state in 2017. This helps to create a total population increase of 158,300 people.
However, those figures don’t tell the full story. Despite these population growths, rental growth has stagnated in recent years. There are suggestions that there’s an oversupply of some types of apartment and housing stock.
Your aim is to avoid those areas that have an oversupply. This increases the chances of your accommodation experiencing low demand.
Tip #3 – Check the Affordability Data
Melbourne’s affordability index currently sits at 44%. Typically, the city’s market rarely gets past this point.
This high percentage comes from a combination of factors. The city’s properties have enjoyed a 93% growth in value since 2009. Comparatively, incomes have only increased by 28%. Rent prices grew much slower than property values during this period. They only achieved growth of 23%, which trended income growth.
This is all important data for a prospective investor to know. The affordability index gives you an indication of the homeowners’ ability to repay their home loan. In simple terms, it’s the amount of the average wage consumed by the average mortgage.
A city with affordability issues, such as Melbourne, may not be the best choice for some investors. You may struggle to recoup enough cash-flow to service your loan, and if you are forced to sell you may have limited demand from buyers.
Check the affordability index in any region that you consider investing into.
Tip #4 – Check the Growth Figures
Many investors make the mistake of buying at the wrong time.
A city’s growth figures provide you with some indication of when the right time to buy actually is.
If you buy at the peak of a growth period, your property isn’t likely to experience much short-term capital gain.
Melbourne’s a good example of what to watch out for. The city’s median house prices grew by 56% since 2012. But the 2018 data suggests that they’re stagnating now and may even fall in the future.
Those who bought in 2017 may see some negative effects due to this growth reversal.
Before you buy, check the location’s growth statistics for at least the last five years. This gives you some indication of the current and potential future state of the market.
Tip #5 – Consider Established CBD Apartments
Melbourne’s Central Business District (CBD) is a bustling economic haven. As such, buying an investment apartment in the CBD may be a good idea.
Moreover, there’s still value to find in established CBD apartments. They haven’t enjoyed the same meteoric growth that house prices have experienced over the last five years.
This means they still have room to grow. Established CBD apartments may run counter to the house market in the coming years. Where house prices start tapering off, we may see established CBD apartment prices grow further.
Tip #6 – Avoid Off-The-Plan Property
Joan Carville’s story highlights some of the dangers of buying an off-the-plan property.
You’re committing to a purchase years in advance when you buy off-the-plan. If circumstances change, you’re left in a difficult position. You will have placed a deposit that you usually can’t get back. And if you can’t adapt to the new circumstances, you’ll find yourself thousands of dollars out of pocket.
There are other issues too. You can’t get a true valuation of a property until it’s built. With off-the-plan properties, you’re basically working from an estimate. The developer may even add a margin to this estimate. This can result in you paying more than you should for the property.
Finally, you’re unable to physically check an off-the-plan property. You’re assuming that the developer’s standards are high enough to make it a worthwhile investment. If they’re not, you could end up with a poorly-constructed property. This affects both rental and capital growth. You may even have to invest further to make improvements to the property.
Tip #7 – Consider Areas with School Zones
A basic piece of investment advice is to always check for school zones when buying a property.
If you invest in a school zone property, you should experience demand from families. Young families prefer to live in these zones for several reasons. The school run gets a lot easier as there’s less commuting involved. Plus, the family has a higher chance of getting their child into the school of their choice.
Areas with school zones typically enjoy strong demand in Melbourne.
Tip #8 – Reconsider if Investing From Overseas
In recent years, overseas investment into Melbourne has taken a major hit.
You need only look at the Foreign Investment Review Board (FIRB) approval figures to see that. Between 2015/16 and 2016/17, approvals fell 65% from 72 billion to 25 billion dollars.
This indicates a difficult environment for overseas investors in Melbourne.
Importantly, overseas investors who are not Australian residents are not allowed buy established properties. Instead, you’ll have to buy an off-the-plan property. And even those buying off-the-plan and development properties saw a marked decrease between 2015 and 2016. Stringent government restrictions & taxes recently introduced now make it costly for foreigners to buy and hold property in Australia.
This suggests that overseas investors aren’t seeing the same value in Melbourne that they’ve seen in recent years.
Melbourne is still one of Australia’s strongest cities. But there are a few issues to contend with if you plan to invest in Melbourne right now. Slowing growth and Melbourne’s affordability issues are both major concerns. So too are the restrictions placed on overseas investors. It is fair to conclude that Melbourne is at the top of the growth cycle and poised for a change in trend.
If you do decide to invest, consider the following:
- Investing in properties in school zones often leads to strong demand.
- Established apartments in the CBD still have room to grow in value.
- The house market may have peaked, which makes it a high risk choice.
Of course, you can always get help from the experts.
The Performance Data researchers have identified the best places to invest for the second half of 2018 and beyond. They've conducted a deep dive into the research and identified the top suburbs with the potential to experience solid growth.