A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Time to buy a beach home or investment?
Thinking of investing in a beach property? Well, there’s an army of professionals waiting to help you. It’s currently all work no play for the holiday home sector. Between Australia Day and Easter is traditionally the busiest time of the year for coastal estate agents. Properties in beach towns within a 90-minute drive of our capital cities are typically in greatest demand.
As of the close of 2018, the prospects of a strong season were promising in Lorne, Victoria and Narrabeen, New South Wales, two popular and well-located beach locations. Ian Stewart, director, Great Ocean Road Real Estate in Lorne and Grant Matterson, auctioneer at LJ Hooker Narrabeen both reported robust results in December.
“I sold a number of beautiful properties just before Christmas,” said Mr Matterson. “Sales of sites with beach views were particularly strong.”
“We had a fantastic end of the year in 2018,” said Mr Stewart. “There was no lull before Christmas, which is very unusual for us.”
Ian Stewart was confident that 2019 would start well. “‘Here we go’, I thought. We’ll open the doors 1 January and the momentum will continue to flow.”
But in Lorne that momentum has dissipated. “It’s been a bit sluggish out of the block,” lamented Mr Stewart.
He doesn’t believe there is a problem with the offer. “Our new year stock is as good as it has ever been in the last five years. And it’s across the price range from $350,000 one-bedders through to $6 million houses,” he said. “And with prices in Lorne only really growing since mid-2015 in the post-GFC period, we haven’t seen the huge lifts in values that is now causing unaffordability problems in Melbourne.”
Despite the slow start, Mr Stewart still feels that the season will pick up and that prices will remain steady. Mr Matterson, however, has already witnessed values in Narrabeen fall around 15% since mid-2017 and believes the state and federal elections brings unwelcome uncertainty. “The market will go sideways or possibly fall a little further. People will sit on the fence,” he said.
The holiday home market is often vulnerable to outside forces. Given the inherently discretionary nature of many purchase intentions – for investors and those looking for a second home – sentiment can turn quickly. Falling prices in capital cities reduces available equity to fund holiday homes and from a confidence perspective, “the edge is taken off the urge due to Melbourne’s negative baggage,’’ as Mr Stewart put it.
As a pure investment proposition, beach homes have lagged their metropolitan cousins in recent times. On top of delivering weaker capital growth over the last decade, rental price growth has been modest and rental yields are at similar low levels to capital cities. At face value, beach properties appear neither a stellar investment from a capital growth or income perspective.
As such, buying a beach property to let is rarely a pure investment play. Ian Stewart believes that the value of the purchase is “supercharged” once the owner “gets personal enjoyment and the associated lifestyle. The financial returns should be secondary.”
If you’re willing to adopt the attitude that you’ll forgo some return for the coastal lifestyle benefits and are fortunate enough to afford to do so, then it may be an opportune time to buy given recent demand softness. But if maximizing financial return is your number one goal, look elsewhere.