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Uncertain period ahead for investment sector, expert predicts

07 January 2019 Reporter
Prediction

Property investors are entering “uncharted territory” as they can finally “time the market” to their own benefit, one expert is claiming.

RiskWise Property Research CEO Doron Peleg describes the current set of market conditions as “extremely unusual”. He said this means investors are able to enter the market at “just the right time” to minimise risk and maximise capital growth.

He said much hinges on the results of the federal election and the treatment of negative gearing and capital gains tax.

“Basically, it’s about waiting for the dust to settle and for the price reductions to stop or decelerate significantly, and only then to start looking around to invest.

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“This is a very unique situation because effectively we are getting very clear notification well in advance regarding those changes to negative gearing and capital gains tax that will increase the out-of-pocket expenses for investors and, therefore, are equivalent to a significant interest rate increase.”

But Mr Peleg said that it is “absolutely proven” that a capital growth strategy is superior to a cash flow one.

“If investors buy prior to the changes, their asset will depreciate as a result of the creation of primary and secondary markets. For investors who look for capital growth, an investment strategy without any reliance on the current taxation benefits is preferred.

“Especially as, if there is a need to refinance or an unexpected need to sell, this is highly likely to result in a loss. To minimise the risk, they need to time the market.”

Mr Peleg said the situation was “extremely unusual” because, since the previous changes to negative gearing in the 1980s, there hadn’t been any similar event which, in a single shot, made major increase to out-of-pocket expenses.

He said other increases to out-of-pocket expenses were largely based around gradual interest rate increases of 0.25 of a percentage point by the RBA or out-of-cycle increases to discounted interest rates, which were gradual and relatively low.

“You certainly don’t see an announcement well in advance, with a high level of certainty that the rates would go up by a full 1 per cent, on a specific date, within a year,” he said.

“It is also very unusual to make such changes to out-of-pocket expenses in the current market environment where there is combination of credit restrictions, the banking royal commission results, limitations on borrowing against self-managed super funds (SMSF), restrictions on lending by foreign investors, a large supply of units and overall a very weak property market in a red zone territory for auction results… it’s simply not happened before.”

He said the perception in the “good old days” was that property prices could only go up.

“But the majority of buyers have only one property, which means most of the audience of ‘investors’ are people who do not have an investment property. So, for them to take the plunge and buy one is a major decision because, generally, in order to provide a deposit, they need to refinance their primary place of residence or take money from an offset account, savings or both.

“For them to jump into this ice-cold pool is not a decision that is likely taken. So to be able to reduce the risk and to time the market, which they can do now, is a very positive move for them. Therefore, overall, until the market stabilises, following the implementation of the taxation changes, investor activity is highly likely to remain low.”

Uncertain period ahead for investment sector, expert predicts
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