Over the past 2 years (give or take), it has been pretty easy to make the argument to invest in residential property just about anywhere. After all, with money cheap (thinking back to those sub 2% interest rates) and values shooting up everywhere, the FOMO was real and it seemed like everyone was in the market to buy.
As things cool done to some semblance of normal again, and interest rates return to the status quo of pre-COVID, over-exuberant behaviour can lead to some less than stellar results – not only when it comes time to sell that investment property down the track, but also in the weekly costs as properties that were bought on a tight yield (that looked fine through our 2021 goggles) now seem to result in more money going out in mortgage and other outgoings than they do coming in through rent.
Now, negative gearing (which I will touch on in more depth in a future column soon) will soften the blow for some by allowing investors to off-set losses against other taxable income but if you found yourself buying in Sydney and paying $1M for a home that was subsequently rented for $500 per week (numbers that are examples only but not uncommon), then you are going to find yourself shelling out an awful lot each week to stay on top of repayments.
Of greater comfort to those buying more locally (I.e. across Cairns and surrounds), our more affordable prices mean lower repayments to start with, but more importantly, rental yields have remained strong (or even grown) in recent years, even allowing for the growth in pricing.
(Net) Cash flow positive properties might become harder to come by (absent a supersized deposit) but there are still opportunities to purchase an investment that washes its face (pays for itself) and many homes, particularly in the $350 - $600K mark, can be bought with subsequent repayments less than what the rent would be for an equivalent home.
What this means moving forward is that while buyers in southern markets might be bleeding money in a cooling market with higher interest rates, our values remain more rational, and backed by a stronger comparable rental value. Not only will this help existing owners weather tightening conditions, but it will also mean that our region remains attractive to those interstate buyers that will start looking outside the capitals for a stronger return, as consistent cashflow trumps potentially uncertain capital growth, at least in the short term.
Tom Quaid is the REIQ Zone Chair for Cairns