why buy investment property now?

This is a question a lot of our friends and family have been asking us, especially since we put in an offer and acceptance a few weeks back on our (soon-to-be) Glendalough unit. The drop in house prices in the real estate market, together with looming higher interest rates, makes it sound like an ominous time to be getting into more debt. I’m also aware my friends particularly are concerned that we’re taking on more than we can chew, and they’re worried about the effect of this stress on my mental health.

From our perspective, though, it really isn’t a big deal. In fact, it suits us really well to buy another property now. There are a few reasons for this.

The first is that there are two items which need to be taken into consideration when purchasing an investment property – the amount at which you can sell your property for on the market (ie. its increase in value) and the rental return it will give. The Perth market is currently ideal for buying and renting, as property values have slumped, while rents are increasing rapidly. (If you’re into flipping houses, or buying, doing some reno work, then selling for a profit, now isn’t such a good time.) Our Glendalough unit is a perfect example. We bought it for $12,000 less than the asking price, which was already very very low, due to needing some cleaning up (painting, etc). There are one-bedroom units in the Glendalough area which sell for $30,000 more than we paid for our two-bedroom. When it settles, we’ll go in, clean it up, furnish it, and make a ridiculous amount renting it out. Perfect! We won’t be positively geared immediately, but we almost certainly will be in a few years’ time. The investment yield (yearly rental income, divided by purchase price, multiplied by 100) will be over 7%.

The second reason is that the tightness in the Perth rental market is unlikely to abate any time soon. As the booming state, there is still record low unemployment. People are coming to Perth for the short to medium term to take up jobs, particularly in the resources sector. While there is a view that this will be short-lived, as an economist I don’t agree. China is sucking resources out of Australia as quickly as we can extract them from the ground. Even if the US, a large importer of Chinese goods, goes into recession, there is still China’s internal development which requires fuelling. After all, one-sixth of the world’s population lives in China, and is rapidly requiring ever more capital works – new roads, new hospitals, new factories. This isn’t even taking India’s immense growth into account. So I see it as highly unlikely that WA’s resources boom will end any time soon. This will continue to attract interstate and overseas job-hunters, who all need somewhere to live.

And interest rates? Again, it doesn’t concern me too much. I know people remember interest rates of 17%. That was when the money supply, rather than inflation, was controlled by the Reserve Bank. We’ll never see those days again. And yes, I am confident of that. I won’t bore you with an economics lesson, but I will state this: the mechanism of interest rate increases and decreases is generally very poorly understood. I can understand why people are afraid of a return to those times. However, fear doesn’t mean it will happen.

I believe in two years’ time the current rates will have worked through the economy enough to dampen inflation, and rates will be on the way down again, or at least moderating somewhat. We’re going to get a fixed term of two years on the new loan, so we won’t be hit with any surprises between now and then.

Anyhow, these are the main reasons why we are buying another property. Whether we’ll still be married after going through more renovations is another story!