Vendors check out while investors cash in

Rising interest rates don't always spell bad news for the property market, according to Andrew Donnelly, managing director of property research firm Braxton Chase. He says those on the lookout for an investment property are shopping around in a buyers’ market, where plenty of bargains abound.

“A 25 point increase in interest rates will have only a minor effect on investor returns, and in most cases any increase will be significantly outweighed by the capital gain that can be made from buying at a major discount,” says Donnelly.

“We are regularly coming across developers selling at up to 20 per cent below current valuation. We need to remember that the interest rate rise affects vendors too.”

Donnelly explains that it’s a simple case of supply and demand: fewer buyers means vendors are forced to drop their prices and, in the rental market, more people are forced to compete for a stagnant number of vacant properties.

“Vacancy rates drop and yields increase. This is very attractive to seasoned investors who can look forward to a period of solid capital appreciation as the cycle moves into its growth phase”, he says.

Jeremy Levitt, director of PodProperty, a service which assists groups of homebuyers and investors to purchase property together, notes however that while opportunities to snap up a bargain in the present market are in no short supply, many aspiring investors will feel that even a modest investment is out of reach.

“We are coming off a decade of record growth in property prices,” Levitt says. “Some of the most lucrative investment opportunities in the market require a commitment that is outside the comfort zone of your average investor.”

Bernard Salt, demographer and partner at KPMG, says there’s every chance the current economic climate will see novel developments like property co-ownership flourish.

“Marriage has traditionally been the standard way of gaining a foothold in the property market, but with increasing numbers of Australians delaying their decision to marry or turning their backs on marriage altogether, we are likely to see more Australians leveraging off other types of relationships to establish themselves financially,” he says.

And despite murmurs that another rate rise is around the corner, Donnelly maintains that the effect of the rate rise on an already-overheated rental market presents an excellent opportunity for investors.

“The market is ripe for the picking if you know where to look and how to negotiate. You’re now buying at the bottom of the market and yields are on the rise.”

Source: API magazine