VICDOC Autumn 2023 - Magazine - Page 71
A
s we move further into 2023,
it’s clear the adjustment phase
of the market cycle has longer
to run, as it rebalances after the
record highs of the COVID years. As such,
Melbourne’s property market is slated for
little or even negative capital growth in
coming months.
After some hard years, especially
through COVID, Melbourne’s rental
investor market is resurgent.
Melbourne’s median unit rental yield
was 4.51% in December, up
18.4% over a year, according
to the Domain Rent Report.
Meanwhile median house yields also
climbed to 3.05%, up 6.8% year on year.
The city saw the greatest decline in
new listings, down more than 16 per cent
year on year to December, and sitting at a
historic low rental vacancy rate, according
to the PropTrack Rental Report.
Rental demand is only set to increase in
the year ahead, as overseas and interstate
population inflows into Melbourne build
after the pandemic, driving population
growth and housing demand.
Amid ongoing interest rate rises,
the resurgent rental market is helping
investors offset the increased costs
servicing property mortgages.
So given capital growth is likely to
remain subdued for the shorter term,
should a prospective investor adopt a
strategy that seeks to maximise the
other source of return — rental income?
Of course, yields vary markedly from
property to property, location to location.
Yields for multi-million dollar mansions
in Melbourne are typically much lower
compared to student studio apartments
or country homes.
These high yield properties often
deliver new owners net positive income
from day one even when, not unusually,
the loan-to-value ratio is up around
80% and there are the other leasing
and maintenance expenses to pay out
each month.
So does that promise of some income
make high yielding properties the least
bad asset to hold in a time of decline?
Are they the property market’s equivalent
of the equity market’s unglamorous but
safe defensive utility stocks that pay a
significant dividend twice a year?
Alas, no. Unfortunately, properties
with high yields tend to be more
vulnerable than average to economic
shocks, not less.
They are often located in areas that
struggle economically in the best of times
due to a limited and narrow economic
base and contain tenants who are more
susceptible to bouts of unemployment
or transience.
Consequently, in downturns, there is a
serious risk of rent arrears and extended
vacancies that can bleed dry an investor’s
cash reserves and capital values that fall
harder than elsewhere.
Those properties essentially have high
yields as compensation for the high risk
the properties present.
In these less certain times for property,
I would much prefer to see a risk-averse
prospective investor sit on the sidelines
than opt for a high yielding asset.
But over the long-term, sitting on the
sidelines and not buying growth assets
— be it property or shares — is a material
risk to one’s future retirement
prospects too.
Few of us are able to ‘time the market’
and buy at the bottom. We instead
invariably become distracted by the
multitude of other issues in our lives
and suddenly 10 years have flown by.
So put aside the market cycle.
Invest when you have the means.