December 2016 - Your questions answered!

By Rich Harvey, Managing Director propertybuyer

With Christmas just around the corner, my thoughts turn to holidays, family fun and escaping work and routine. What do you have planned? Thanks so much to everyone that wrote in with their questions - I was overwhelmed with the number but hope to answer the most important ones below which related to prospects for capital growth / strategies for divorcees / beginner strategies on low incomes / is Sydney oversupplied with units / and pitfalls with granny flats.

This December update includes:

Your questions answered!

To mix things up this month I asked readers to write in with their top property questions. Apologies if your question does not appear, but here are the top five questions.

Q. On a very conservative basis, what do you foresee / expect growth % in residential property prices in the next 3-5 years from where we are now?

They say that "an economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."

Jokes aside, Sydney and Melbourne will again be leaders of the pack - despite the unprecedented rises in the last 3 to 4 years - due to their pre-eminence as job creation and financial capitals. Sydney in particular has very strong infrastructure drivers, a strong local economy and stable government attempting reforms so this will support market growth. With the exception of Darwin and Perth, I foresee the other major capital cities will experience moderate price rises - however each capital will perform differently according to individual city drivers.

Louis Christopher from SQM research made his predictions which we reported in our November Newsletter (click here for the exact forecasts). This suggested double digit growth for Sydney and Melbourne in 2017 and closely followed by Hobart.

From my perspective I'd like to see growth seriously moderate to give buyers a chance to catch their breath and the market return to more balance.

Low interest rates are a huge factor driving borrowing demand and buyer behaviour. Tougher credit controls are likely next year. I also foresee a bigger gap in capital growth between apartments and houses. Houses are likely to have greater gains (but lower yields).

In considering a buying decision, my strong advice is don't just look one year ahead in isolation - look at the long term fundamentals of the area you are buying. There will be periods of slow or NO growth. Look ahead 10 years (at least one cycle) and hold for long enough to get the growth required. The other key trick as we head into more moderate cycles is to do a build or value add (reno) strategy. This means you don't rely on a rising market to increase your equity.

Q. I plan to convert a double garage to a granny flat. What are the key things about granny flats that create the most value? (put another way) What about them is generally most attractive to buyers? What pitfalls are you most conscious of?

Great idea to convert a double garage to flat. Granny flats are a brilliant and cost effective way to increase the yield on your property asset. Several things make them attractive.

Benefits: Low build cost, quick approval process (with private certifiers), high yields, can build virtually anywhere in NSW under affordable housing SEPP, can create positive cashflow. Also very attractive for owner occupiers to pay off your mortgage faster or give you additional living space for growing teenagers / extended family or perhaps airbnb. Don't expect to get a huge equity uplift with the flat - typically value would increase by the construction cost - but it makes it far more attractive on re-sale with the additional income stream.

Pitfalls: Be careful of setbacks and sewer lines when you position the flat - get planning advice where required. Be sure to position the flat to ensure ongoing privacy between the main house and the flat - you need to put up a fence anyway but think also about noise transfer. Choose the builder carefully - plenty of sharks out there. Don't over-capitalise on construction costs - build to the correct specs for the suburb. ie. on the beaches you want a stone benchtop, but in the west laminate will suffice.

Q. What is the best property investment strategy for a divorced person (man)? What strategy would suit a beginning / low cap / low disposable income property investor? Is it possible to positively gear at the low end?

Going through a life changing event of divorce can change your priorities. My advice is to not sit on the sidelines for too long but get back into the property market as soon as you can. Obviously the split of assets will have a huge impact on your overall financial position and you will need to recalibrate your expectations. But getting back on the investment journey is essential and will also give you better peace of mind.

If you find yourself with a much lower budget for a property of say $450k (which is well under Sydney's median house price over $1m or Melboune's $750k), there are still plenty of options. Buying in large regional areas like Newcastle / Wollongong / or interstate in Brisbane can deliver excellent long term growth and positive yields. We are regularly buying properties in the $300k to $450k range and achieving close to a 6% yield (or when adding a granny flat, getting around 8% yield).

Be careful not make an emotional decision for your investments. Having a low income should not disqualify you from smart investing. Get a clear estimate of your borrowing capacity from a finance broker and possibly consider paying LMI so you need a smaller deposit on your first property. Positive gearing is a great strategy when combined with areas that also deliver long term growth.

Q. When considering selling privately, ie. not via an agent, what should you be mindful of during that process?

My advice is simply not to sell privately as you would not be maximising your sale price. There are several pitfalls with this method:

• You are limiting yourself to one (or just a handful of buyers) - you don't know if there is someone out there willing to pay more
• Some buyers feel uncomfortable dealing with the vendor - they prefer dealing with the sales agent as the middleman
• You can't run a competitive campaign
• Your marketing won't have the reach of a normal sales process
• Vendors may not be trained negotiators to achieve best sale price
• Tidying up and hosting open inspections each week
• Vendors could over-quote or under-quote their price
• Vendors can come across too desperate - agents are more consistent and professional in their approach
• Agents know the market and know how to create competition amongst buyers to get the highest price
• The online sites like For Sale By Owner make it seem like you are saving money - where as in fact you are doing yourself out of more money.

Property is the most expensive asset you will buy or sell in your lifetime so it pays to get professional advice on how to sell and how to buy. You can also check out our "Vendor Advocacy service" where we help you select the best local sales agent.

Q. Is the Sydney unit market in general treading close to over-supply territory?

While we are seeing large numbers of cranes and construction sites around Sydney pumping out more units, I don't believe we are fundamentally oversupplied. Media headlines of a major correction / crash are pure speculation and attention grapping. We have seen some record numbers with building approvals in the last two years - which is driven by several factors - low rates, migration, Chinese buyers, improved planning regimes and previous years of undersupply. Population growth and jobs will continue to soak up any potential over-supply of apartments in the next 3 years.

Yes - there may be small pockets of oversupply in areas such as Mascot, Zetland, Green Square, Auburn, Liverpool, Parramatta, Blacktown, Hurstville and Kogarah. But these are likely to be very short term issues. The vacancy rate will be the telling factor for any oversupply. At present vacancy rates are holding steady and prices are stable.

SQM research reports that Sydney is potentially oversupplied by just 4000 dwellings in 2017 and 9000 dwellings in 2018. But considering our population is 4.9 million plus this is a small blip to overcome. BIS Shrapnel is forecasting that it will take more than five years to clear what it estimates is a 50,000-strong shortage of homes.

There are plenty of suburbs where apartment approvals are minimal, meaning low stock levels and capital growth will remain very strong in decades to come.

If you are looking to buy your next home or investment property and get the inside running on the best suburbs for future growth please call my friendly team of professional buyers agents on 1300 655 615 or email your property wishlist today and start a conversation today.

Rich Harvey is founder and Managing Director of www.propertybuyer.com.au, Australia's most awarded Buyers' Advocates.  Propertybuyer helps property investors and home buyers search and negotiate the right property at the right price, every time. Visit www.propertybuyer.com.au or call 1300 655 615.