The days of investing in a quality cash flow positive property are dead given that annual out-of-pocket costs of $15,000 is the ‘new normal’, according to new research.
National property market analysts and buyer’s agency Propertyology says for those wanting to invest in a detached house purchased now with a 10% deposit, only six of Australia’s 20 largest cities have an annual cash flow shortfall of less than $10,000. The company says ballooning holding costs further compound Australia’s ability to generate the much-needed influx of extra rental supply to reduce the intense pressure on household rents.
Propertyology head of research Simon Pressley (pictured above) said someone looking to invest into a middle-ring Sydney municipality such as Parramatta could expect an annual cash flow loss of $48,000 if purchasing a standard detached house with a 90% LVR.
“One would be a fool to make a financial decision with anywhere near that level of annual loss from an individual asset,” Pressley said. “The same scenario in Melbourne’s middle-ring Maribyrnong today produces a $28,000 annual loss. Meanwhile, the annual shortfall between rental income and associated expenses in Adelaide, Brisbane, Hobart and Canberra is now $15,000 to $20,000.”
Propertyology’s research found that the best cash flows from a current purchase in one of Australia’s top 20 cities are found in Darwin, Mackay and Townsville where a property investor’s annual holding cost for a standard house is approximately $5,000.
“Perth, Cairns and Toowoomba are next best with cash flow shortfalls of between $5,000 and $10,000 per annum,” he said.
Pressley said of townships with a population of 15,000 or more, only Port Hedland, Karratha, Broome and Kalgoorlie were cash flow positive if purchasing a detached house right now.
“It always pays to cast the net wide. For example, a major regional city like Dubbo (population of 55,000 and Australia’s 44th largest city) has already produced a similar average annual capital growth over the last 20 years to Sydney and with net annual holding costs of approximately $9,000, currently has one the best cash flows in Australia for property investors.”
PropTrack’s latest Home Price Index has revealed Australian house prices slipped by 0.21% during December, placing values 2.29% lower compared to 12 months ago.
Anne Flaherty, PropTrack economist and report author said at a national level, property prices have seen nine consecutive months of price declines, now sitting 4.25% below their peak.
“Performance has been mixed across markets, however the largest falls were recorded in the more expensive capital cities of Sydney, Melbourne and Canberra, while more affordable markets have displayed greater resilience,” Flaherty said.
Pressley said while landlords had been beneficiaries of fast-rising rents during recent years, bigger increases in expenses established a “new normal” for property investment cash flows.
“Mortgage holders were spoilt by a couple of years of abnormally low interest rates and I believe it is inevitable that the cash rate would eventually get back to hovering between 2.5% and 3.5%,” Pressley said.
“In a big-picture scheme of things, I think that’s healthy. We are now in the middle of this range, but the timing of the recent rises creates a perfect storm for the already dire shortage of rental supply.”
Pressley said the 2022 calendar year ended with only 32,000 properties advertised for rent across Australia, compared to 80,000 advertised properties at the same time three years earlier when the national population was 700,000 fewer.
“Housing does not grow on trees and at least 200,000 permanent skilled migrants plus 500,000 international students will arrive over the next 12-months, resulting in even more tenants getting displaced and rents (again) rising significantly in 2023,” he said.
“The nation depends heavily on everyday Aussie property investors funding 98% of all existing rental accommodation to Australia’s tenant population of approximately eight million people.”
Pressley said the impact of rising interest rates, insurance costs, city council charges, rental compliance costs, APRA’s unreasonably tight credit policy and the attitudes of some state governments were all having a big influence on the decisions of property investors.
“There is a big body of evidence available now to suggest that conventional detached houses typically enjoy twice the rate of capital growth of apartments, townhouses, duplexes and houses with granny flats. My best general advice to every investor is to consider yourself ‘borderless’. The city that you personally live in is irrelevant.”
Melbourne broker Nathan Massie of Sprint Finance, said plenty of investors are still keen to buy property as the power of owning an investment property could be life changing.
“An investment property is an asset,” Massie said. “However, people are often scared of debt, so when a borrower has a debt on their investment property’s mortgage, they want to pay it off as quickly as possible. It is all about changing that mindset and turning it around to make your debt work for you and not against you.”
Pressley said for current investment property cash flows, a realistic rule-of-thumb in the current climate was for investors to budget on an annual shortfall of $10,000 to $15,000.
“That said, Propertyology’s latest research project uncovered a variety of regional locations where using just a 10% deposit, a standard house is likely to have an annual rental income shortfall of less than $8,000,” Pressley said.
“In Queensland, it includes Rockhampton (Australia’s 29th largest city), the Whitsundays and Airlie Beach. NSW locations include Parkes and Casino. Meanwhile, Mildura and Swan Hill in Victoria, Murray Bridge and Port Lincoln in South Australia and Geraldton and Esperance in Western Australia are also in the sub $8,000 category.”
Pressley said housing would never go out of fashion as shelter was an essential commodity.
“It is no wonder that many who seek a good retirement lifestyle choose residential real estate as their preferred asset type,” he said.
“Literally millions of existing Australian households are currently sitting on significant financial capacity. Legacy of the recent national property boom, household equity has skyrocketed such that the median house price in 130 of Australia’s 150 largest townships has increased by 40% (or more) over the last three years.”
