How to determine fair investment value

Moody’s Analytics has announced that, given Australia’s current low interest rates, much of the country’s housing stock is at ‘fair value’ at present; with Victoria and NT already too expensive, yet Queensland, WA and SA being undervalued.

Sydney, amazingly – according to Moody’s – is just slightly overvalued.

And whilst this sounds like great news, Moody’s Analytics believes that Australia’s housing markets (with few exceptions) will become overvalued if (when) interest rates rise back to normal levels and push up mortgage repayments.

Moody’s estimates the ‘normal’ cash rate is 4.5%, being 2% higher than current levels.

But what is fair value?

How can an investor – as one could argue that for an owner-resident, value is largely an emotional thing – best determine a property’s value?

Rental returns

For mine, rental yields should really be used as the benchmark to help determine an investment property’s value.

And the 5% gross rental return – the old school marker which essentially converts to $1 in weekly rent for every $1,000 spent buying a property – is still the most accurate measure, in my opinion, to help determine investment value.

So for most investment property, when gross rental yields are under, say, 4.5%, they are overvalued.  The reverse applies for dwellings with gross rental returns over, say, 5.5%; assuming the rent is sustainable over the longer  term.

This approach, I think, should also be used much more by valuers rather than the wishy-washy comparisons made via the ValEx system or the like.

Some trends

Our analysis for this missive has found that:

• In general, compact housing offers better investment rental returns than detached houses.

• Sydney and Melbourne – for property investment – look overvalued to me.

• In contrast, Brisbane and much of SEQ, for investment, look undervalued.

End notes

I have travelled a lot in recent weeks giving market outlook presentations to audiences of investors.  My travels have taken me to most capitals plus several regional towns.

Many with whom I have spoken seem confused.  Their heads are full of the latest property commentary.  Few seem to have a basic set of rules that help them to assess a property’s potential.

One of my presentation points is that investment value is best determined by rent.

I know it is basic stuff, but sometimes the simple things are often the best.