A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Holiday homes not good use of equity mate
“Equity mate” was a clever and successful early noughties big-bank advertising catchphrase. It featured in ads encouraging us to unlock the equity – the value less outstanding borrowings – in our home to fund various dream projects: home extensions, investment properties and holiday homes. It was a creative perfectly crafted for its time – an era of strong price growth and therefore equity growth too.
It wouldn’t have worked more recently. Two years of falling property prices in most capital cities following the mid-2017 peak delivered a shock of shrinking equity. As a countervailing response, many Australian have been making extra mortgage payments, which explains in part the sluggishness of consumer demand and the economy overall.
But equity growth is now back. Prices rose strongly in Sydney and Melbourne in the last six months and I expect robust or solid price growth in most capital cities over 2020.
Every real estate (and financial services) professional wants your equity. They want you to choose them to help put it to work. They are all jostling for position and attention.
For now, it’s the holiday home estate agents who are in pole position to make the winning case. Many of us have stayed by the coast or in the bush during the summer break, and there may be some weekend and public holiday trips yet to come before Easter. Unsurprisingly, regional real estate offices, with their windows full of listings, are situated near the cafes and gelato bars. Summer has been one long marketing campaign.
Part of the sales pitch is the investment opportunity: to make money leasing the property out to holiday makers and, eventually, through capital growth. And after experiencing sky-high summer holiday rents and packed townships, it might seem like a sure bet.
But move cautiously. Holiday homes can be a challenging investment.
Occupancy and rental income is inherently seasonal and variable. Short-term leases also require significant administration and the high turnover of guests inflicts greater wear and tear on a property than traditional tenancies. Plan for high property management fees and maintenance costs and assume a conservative net rental income, accounting for borrowing costs.
Perhaps you’re banking on the acquired holiday home growing in value and delivering its own equity windfall one day?
Coastal property – and some bush property – can deliver episodes of solid or even strong capital growth. This is especially true of property within 60-minutes' drive of the capital cities. The successful properties tend to benefit from multi-faceted demand, be it city commuters and/or affluent locals. In other words, the location is not dependent on the holiday trade. Don’t expect these returns in more remote places.
But beware. Holiday property prices can be very volatile. These are among the first assets sold in an economic downturn when there are few buyers for such extravagances, and crippling price drops do happen.
So, if you’re ultimately investing to make money, why punt on a somewhat novelty asset? There are plenty of safer opportunities in the more conventional long-term residential lease market, underpinned by the diverse economic activity of our cities and larger towns.
I’m usually one to encourage readers to invest their equity rather than consume it. But for holiday homes, I would prefer prospective buyers to put aside thoughts of making money. Only buy one if you can afford as a lifestyle expense and have the time to enjoy it. Any rental income is then a nice bonus rather than a must-have. OK, mate? Richard Wakelin, Australian Financial Review.