There has been plenty of media coverage lately on the property bubble, the property downturn, the property headwinds, first home buyers, too many units and many other click-bait-orientated headlines. 

Property makes up a great deal of some household budgets – whether that is via rent payments or mortgage payments. It takes up a lot of thinking time and a lot of discussion time at social and professional events. And it is part of the Australian landscape (pardon the pun) and way of life.

But is there too much hype?

Certainly the numbers that have been released by data houses are suggesting that residential housing in parts of Australia is slowing down (Sydney and Melbourne) but other parts of Australia are still holding up (Hobart and Brisbane). Regional Australia is also up or down depending on where you live. 

The psychology of house prices going up assists in the wealth effect for consumers, so they spend more on goods, services and experiences. This has a positive effect on the whole Australian economy.

The reverse in housing prices can also impact consumer spending, as people defer purchasing and instead concentrate on paying down debt or just managing to survive week to week. Regulatory impacts and interest rate decisions also impact the decision making around property investment and also consumer spending. All of this has a negative effect on the whole Australian economy.

Consumer sentiment

Consumer spending makes up approximately 60% of our GDP. Therefore the consumer psyche is very important, not only to the property industry, but also the investment community and all levels of government. 

This is perhaps why the media coverage is so saturating, but how does it impact on the individual investor and their total portfolio of assets? It will be different from investor to investor.

For example a loss of a tenant may impact an investor more than a 15bps rise in interest rates. The three pillars of investment – budgeting, liquidity and diversification – apply to property just as much as any other asset class. The rules of investing do not change just because the asset is physical and not a piece of paper.

Price fluctuations 

As with any investment, prices go up and down. Just look at the stockmarket, an alternative to property, as an investment. Prices on the stockmarket change in real time as people buy and sell depending on their circumstances.

I know what my portfolio is worth at any point in time. If one of the shares I own falls 5% over a year does anyone ring me from a national newspaper or a TV show wanting to discuss the wider ramifications of such a move? No, because the situation is not emotional and therefore not newsworthy. Hopefully other shares or investments in my portfolio have performed better over the year which is the whole point of diversification.

The difference with property 

Property is a significant lump sum purchase, that has large add on costs like stamp duty and financing charges. It takes time to sell a property and then there are more lump sum costs. This applies whether you are an investor or an owner occupier. So budgeting and cashflow is important.

Financing costs can go up as well as down. We are now in a period of the investment cycle, where on a daily basis there is commentary around:

• Whether the Reserve Bank of Australia (RBA) will raise interest rates, and if so, by how much and how often?
• Will financial institutions raise interest rates outside of official interest rate rises by the RBA?

The big four banks have now withdrawn from lending money to SMSFs to acquire property. This may have an impact on the prices of property in certain markets.

Residential versus commercial

The yield on an investment property can disappear if a tenant is lost or cannot be found. This will impact the price of your investment, as potential buyers or valuers calculate what the property can earn.

Property fanatics can invest in commercial property instead of just multiple residential properties. Commercial property can cover different sectors like office, industrial, shopping centres, pubs and healthcare buildings. The yield on these properties is traditionally higher than residential properties, but the capital growth on these properties tends to be more consistent than for residential properties.  

Commercial property can be purchased directly, via a managed investment scheme, or by acquiring shares in property developers  /owners that are listed on the ASX. Some diversification can be achieved by considering these investments.

Seeking sound advice 

If property prices do fall and  /or if interest rates go up, what will be the impact on your household or portfolio? This is the type of discussion you should have on a regular basis with your financial advisor.  

Lantern Advisory can assist with formulating a lifetime plan, taking into account various time periods within your working life or similar. As advisors we can:

• Assist in making sure any property investment considerations are kept within budget and cashflow parameters
• Assist in protecting assets and family lifestyles when large debts are taken on as part of a property investment
• Assist in discussing diversification strategies, so cash can be accessed if required due to a tenant loss or another cashflow impacting event

Diversification strategies can also help smooth out volatility and keep portfolios ticking along so investment goals and objectives can be reached.

More information

For more information on establishing, managing or diversifying your property portfolio, please contact Ian Walker at Lantern Advisory on 07 3002 2690. 

Disclaimer:
The information contained in this article is of a general nature and does not take into account personal circumstances. Before making any decisions based on the factual information contained in this document please consult with your financial adviser.