Australians consider residential property investment as one of the safest ways to build wealth, and for good reason: for decades upon decades, the upward trajectory of the property market has ensured that property buyers almost always multiply their initial investment.
That said, it’s important to remember that every investment has its risks, no matter how secure it may seem.
Following Sydney’s recent boom and with the changing real estate landscape in 2017, experts believe that the following risks will start to show up soon – and you should be ready for them:
Risk of rising interest rates
At the moment, global interest rates are at an all-time low, making borrowing costs easy to manage. Though Australian banks have recently tightened their lending criteria, interest rates still remain historically low, with both variable and fixed rates available at between 4-5%.
However, it is hard to predict if this will continue in the medium or long-term, and economists are split on where interest rates will go in the year ahead.
It’s also important to consider that homeowners on interest-only loans may not be able to pay their increasing mortgage expenses when rates increase and the loan converts to principal and interest. During times of evolving lending standards and a shaky interest rate outlook, it pays to ensure your financial ‘house’ is in order, and that you can afford an increase if applicable.
Risk of rising unemployment rates
Australia continues to enjoy a low unemployment rate at 5.8%. However, throughout 2016 we experienced flat employment growth, and more and more employers are hiring part-time or freelance workers instead of full-time.
If this trend continues, it may result in a slowdown of wage growth to a record low, just a little above inflation. Coupled with a possible interest rate rise, rising unemployment and stale wage growth could lead more home loan borrowers to have a difficult time managing their repayments. As conveyancers, we have seen countless situations where homeowners are forced to sell their beloved property due to financial difficulties, with interest rate rises a contributing factor.
Risk of property bubble getting bigger
Australia’s major banks have downplayed talks of a property bubble, but the huge recent annual increases in house prices have many experts worried that some markets are officially reaching ‘bubble territory’.
Across all state capitals, prices have risen 47% since June 2012 (on average), reports CoreLogic, with Sydney leading the charge at 75%. Such a growth imbalance should not be ignored, as any catalyst – like interest rate increases, an unemployment rate rise, a slight economic downturn, and/or higher debt levels – could pop the property bubble and send the market crashing back to reality.
The risks being faced by property owners in 2017 are not limited to what is happening within the country. They are also correlated with the threats within the global economy, such as the rising debt levels in China, the low performance of European banks, and the uncertainties brought about by new United States leadership. As a homeowner, being aware of these risks can help you make informed decisions when it comes to your home and property investments.