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To counter the impact of inflation, many mum and dad investors are looking to hedge against inflation by doubling down on their property holdings.
The Reserve Bank of Australia this month made it clear that rents were going to continue increasing as interest rates start a steady, if not rapid, march upwards.
The monthly RBA minutes noted that noted that housing market conditions had become more varied across the country in preceding months.
“Prices had declined a little in Sydney and Melbourne alongside falling auction volumes and clearance rates, however, in most other capital cities and regional areas, price growth remained strong, supported by a low number of properties for sale.
“Growth in advertised rents had also been particularly strong in these parts of the country, consistent with very low vacancy rates,” the RBA Board noted.
Turbulence in the property market has indeed seen house prices in Sydney, Hobart and Melbourne come off the boil, recording flat to falling housing values. In contrast, Brisbane and Adelaide’s quarterly growth shows no sign of flagging, rising at 20 plus per cent, with Perth and Darwin also performing well.
Meanwhile, inflation spiked sharply at 5.1 per cent at the end of the March quarter, sparking speculation about which direction the market is heading in.
There’s been the tumult of a federal election that had property affordability at the centre of campaigning. Then the RBA lifted the official cash rate to 0.35 per cent, the first increase since 2010 and the first time in more than 11 years that it has intervened in the middle of an election. It’s been quite a ride.
No one likes watching purchasing power to erode. To counter the impact of inflation, many mum and dad investors are looking to hedge against inflation by doubling down on their property holdings.
Real estate has long been viewed as a hedge against inflation, as rent and property values frequently rise with inflation. This view is supported by historical data that suggests real estate is an effective inflation hedge and the RBA’s assertion that interest rates may not have their intended effect on dampening inflation.
“Another source of uncertainty related to how household spending in advanced economies, including in Australia, would respond to a period of rising interest rates and the decline in real wages,” the minutes noted.
Mums and dads in box seat
While the increase in the cash rate has roiled commentators almost as much as talk of rampant inflation, investors are still getting into property while they can still access relatively cheap money.
Even with a rate increase and the promise of potentially more to come, this has only emphasised the fact that more than ever, it’s important for discerning property investors to buy assets that are going to increase in value as a hedge against inflation.
Then there’s the lingering impact of the past 16 months of double-digit growth in property. This has seen mum and dad investors enjoy substantial increases in their home equity together with significant rent increases from a tight rental market.
The combination of these market forces has put Mum and dad investors in the box seat to continue building their property portfolio.
Taking advantage of healthy home equity levels to target investment properties at affordable price points in prime city locations around the country has become the focus for many investors.
Regardless of where interest rates go, retail investors are still keen to get into the market.
Looking back to predict the future
No one has that crystal ball to predict the future of the property market. Those who bought property during or soon after the covid lockdown period have enjoyed the largest capital growth spurt in this country since the 1980s. Now, savvy mum and dad investors are anticipating a period of inflation. They’re seeing it as a time for lifting their level of real estate investments within their portfolio.
Macroeconomic trends, including the covid stimulus package, and improving GDP and falling unemployment, suggest inflation is here to stay.
In turbulent times, prudent investors look to protect the value of their investment portfolios. Previously, residential real estate and farmland have proved to be strategic hedges against inflation.
FOMO (fear of missing out) is evaporating from the Australian property market. Buyers reflecting a sense of caution seeping into the market are increasingly taking their time to make strategic investment decisions.
Last year prospective buyers took shortcuts and cut corners to enter the market, an investment strategy that usually ends in tears.
Affordability constraints
While the more affordable and outer suburban markets have performed strongly to date, affordability is emerging as an issue. Many investors have experienced minimal wage growth at a time when property prices have boomed.
As mum and dad investors’ priorities evolve, some buyers will be willing to pay a slight premium for properties with a little more space. Increasingly, however, it won’t be solely the property itself that will need to meet these emerging preferences, “liveability” in terms of location will play a major part too.
Those whose budget can stretch a bit will pay a modest premium for the ability to work, live and play within a 20-minute drive, bike ride or a leisurely stroll from home. Mum and dad investors looking to rent their property have picked up on this trend.
They are looking for factors such as schools and in particular, proximity to private schools, shopping, access to recreational and sporting facilities, the strength of the local community vibe, availability of business services, and the prevalence of secure jobs within a 20-minute radius.
Regardless of the outcome of the federal election, mum and dad investors remain keen on the property market. They see real estate as an effective hedge against inflation, given that class of assets typically has little correlation with the stock market.
So, investor interest remains vibrant, even as a super-hot property market slows, mortgage rates threaten to creep up, the RBA predicts inflation to stay above target until late 2024, and the supply of housing stock contracts.
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