The economy and a few key market fundamentals always have an impact on property investment. Sometimes the impact is significant, other times it is undetectable, but the investment property market is constantly shifting. The good thing about property investment is that it is usually for the long term so any fluctuations; peaks and troughs generally balance out over the lifetime of the investment.
Regardless if you are a first time investor or experienced investor, you should always take the property investment market fundamentals into consideration before investing. However, don’t let the fundamentals dictate your strategy because there are always good investment opportunities to be found in the Western Australia property market, regardless of the economic climate
A brief introduction to a few of the key property investment market fundamentals are outlined in further detail below:
PROPERTY INVESTMENT & THE ECONOMY
The health of the economy (global, national and state) has a direct impact on the property market. A strong economy, such as that experienced in Western Australia at present, drives a growth in population and a healthy appetite for housing, rentals and investment properties. Conversely, a struggling economy is often reflected in rising unemployment. This can create a decline in population numbers as people seek employment elsewhere which reduces the demand for real estate. As confidence returns and the property market in Australia picks up, the population movement is reversed and property demand increases.
REAL ESTATE CYCLES & MARKET CONFIDENCE
Just as the economy moves through cycles, so does the property investment market. History shows real estate moves through a cyclical pattern, which is highlighted with ‘boom and bust’ scenarios at its most extreme. These scenarios are often fuelled by rumour and media reporting. In these cases investment property advice is to conduct research and base decisions on fact and evidence, rather than speculation and hype. There are worthy investment opportunities to be found in any market, so don’t be afraid to invest if your research shows there are good prospects for substantial future capital gains.
PROPERTY INVESTMENT SUPPLY & DEMAND
One of the most basic fundamentals of the investment property market is supply and demand, which has a direct impact on price. Demand refers to how much a product or service is desired by buyers, and supply represents how much a market can offer. Increased demand usually creates an increase in price, as buyers are willing to pay more for what they want, where as an increase in supply generally creates a drop in price as buyers are spoilt for choice. You should carefully consider supply and demand levels in an area when considering an investment opportunity. Here’s a quick list of things to review:
- The average number of days a property sits on the Western Australia market in your target area and how long your preferred property has been on the market.
- Check for any property discounting over the past twelve months, as this will give an indication of buyer interest in the area.
Supply and demand is playing an interesting role in the Perth property market at present, with population growth driving an increase in demand for housing and rental accommodation. Demand is exceeding supply, creating an increase in property prices, particularly for rental accommodation. The only way this will ease is if population growth decreases or the supply of property increases.
There is a great deal of industry speculation predicting a severe housing shortage in WA by 2020. This is good news for property investors, as it will continue to drive capital growth and rental income.
WAGE LEVELS & PROPERTY INVESTMENT
The state of the economy also has an impact on wage levels which impacts on the property market, house prices and building activity. A buoyant economy is usually reflected in higher wage levels, resulting in a greater demand for housing (and often at higher house prices). Higher wage levels usually represent a higher level of disposable income and greater opportunity for people to use surplus income to invest. Property investment activity is not only dependent on higher wages, but also affected by access to credit facilities (home loans) in line with the current interest rate.
INTEREST RATES & PROPERTY INVESTMENT
The interest rate is set by the Reserve Bank of Australia (RBA) and guides your income (on funds deposited) or your cost of funds (as a borrower). Your financial institution makes the decision to pass on any cuts or raises set by the RBA and interest rates can often have an impact on investor’s enthusiasm or capacity to purchase property. Higher interest rates lower building approvals and activity in the market, whilst lower rates stimulate activity as the costs to borrow are reduced. Interest rates are influenced by local and international market forces and can be volatile. Interest rates in the Western Australia property market are currently the lowest they have been since 1959, which creates attractive lending conditions for investors.
INFLATION & PROPERTY INVESTMENT
Inflation is caused when the cost of goods and services rise, and subsequently purchasing power falls. Most countries will try to sustain an inflation rate of 2-3% and will adjust the interest rate to control periods of severe inflation or deflation. If inflation levels are too high, interest rates are increased to dampen demand and when the economy starts to slow, rates are reduced to stimulate activity and spending. Inflation and deflation impacts the interest rate and, as outlined above, interest rates can impact an investor’s capacity or enthusiasm to purchase.
POPULATION & DEMOGRAPHICS
Population and lifestyle changes also have an impact on the property investment market and the market needs to adapt over time to respond to and accommodate these changes. These changes can be driven by fluctuations in population numbers and movement, changes in technology, different housing preferences or needs, or changes in demographics (for example, an increase in the aged population). By gathering current information and following these trends, an astute investor can use this information to their advantage to benefit their investment decisions.
As mentioned earlier, there will always be economic activity that affects the property investment market in Australia. Once you understand the market fundamentals, you are better placed to make wiser and more informed property investment decisions. The only problem is time. Often it is difficult to find the time to research a particular suburb, let alone global trends, population migrations and economic data. This is where Investor Assist can help.
Our Property Investment Specialists are employed for this very job and have their fingers on the pulse in terms of the industry and smart areas to invest. So if you are finding you don’t have the time to do the research, get in touch with Investor Assist, and we’ll do the hard work for you. It’s what we are here for – and the best part, our knowledge is completely free.