2 Property investor trends that are likely to continue post pandemic
There is a lot of speculation in the media right now about property prices, clearance rates, the bottom of the market and basically everything else you can think of. In fact, if you have a pulse and a theory, you are probably going to get some airtime. Personally, I think there is more value for property investors in studying the longer-term trends and there are a few key trends that are likely to continue.
Just before the COVID-19 pandemic, we completed a four-year study on investor behaviour. The study took four lots of 1,000 property investors to chart any trends over the combined period and 4,000 residential properties. The data is a mix of unique information we gather from our investor clients through the course of completing our tax depreciation schedules, and from our own investigations, we found some interesting trends.
1. Investors are buying more new property than they ever have
It was not a huge surprise, but it is a trend that has some sizable implications. Even in the last week, we have had incentives pointed at new properties with the Government announcing cash incentives to build. One of the biggest changes that shifted investors towards new property was the May 2017 changes to tax depreciation legislation for plant and equipment items. Basically it meant that if you bought after May 2017, you’re no longer able to claim key deductions for items such as floor coverings, window furnishings, air conditioning and kitchen appliances unless you either buy a brand new property or buy the asset brand new. New property was already arguably more attractive from a tax deductions point of view, but this really shoved the incentives squarely towards the new property investor.
What did the data show? Well, the four-year increase in people buying a new property was up by 107.53%. As at the end of last calendar year, 49.6% of investors purchased a brand-new property.
What are the implications I mentioned earlier? Well if there is one place that property spruikers tend to loiter, it is around brand new property. There is a whole industry dedicated to selling brand new property and that is not in itself a bad thing, but there’s potential for advisors to value the commission cheque over the value of the investment. It’s much easier to overpay for a new property than it is for an established one (though I’m sure you could manage it), and there are plenty of stories about investors trying to settle on their off-the-plan apartments that have fallen in value even before the development has finished construction. Generating new supply is good for the economy and the construction industry, but investors need to be careful that they are doing their due diligence and receiving the best advice.
2. A lot of property investors become investors by accident, and the numbers are increasing.
25.7% of investors occupied their property themselves, prior to turning it into an investment. Now that was once a complete surprise. I couldn’t have guessed that the number would be that high. For anyone not paying attention, that’s a quarter of residential investment properties were not investments from day one!
Ok, so now you’re thinking that it was too hasty for me to say “these people were accidental investors, after all this could have been their plan from the start. You’ve also got your investors that live in the property for 12 months to claim the first homeowner grant and then move out.” These are all great points, hypothetical reader voice in my own head, and in many ways you are correct. It’s not true to say that ALL these investors are accidental. However, you’d be surprised how little of them are living in their property for strategic reasons. For me, it all comes down to the magic little piece of extra data, that is, the average number of days these investors occupy their property for. If it was for a first homeowner grant, it would be close to 365, right? Well the average number of days was 1,537 last year. So that is, on average, of the quarter of all investors that occupy their property prior to renting it out, the average amount of time they spend living in it is 4.2 years! That figure for me says that there’s more to this story. Yes, there will be some first homeowner investors, yes there will be some tactical investors. However, there will also be some homeowners who want to upgrade and realise that their broker is telling them they don’t need to sell their old property to buy the new one. The percentage of people living in their property prior to rental has gone up just shy of 4% per year over the last 4 years, so it is increasing as well.
What are the implications here? Well, it is important to consider whether that property is indeed ‘investment grade’, but that’s a whole other story. The study found many other trends that provide some valuable insights for investors, but those are the two I’ll leave you with today. You can get a copy of the ‘MCG 1000 Assets Study’ here.
To summarise, property investing is a game of patience and too many investors chase the hotspots or try and time the market. The same rules of investing pre pandemic are likely to hold true. That is that good quality assets with scarcity value will remain popular. If it was in demand before, it is likely to be again, so try and avoid the noise and read the long-term trends.
