Negatively geared investors should be very wary about taking on any more risk in 2018.
Because change could be on the way, according to Michael Hutton, head of wealth management at HLB Mann Judd Sydney. He says property investors, especially those whose total income only just covers their lifestyle needs and investment holding expenses, could find themselves severely stretched.
Hutton says property investors will most likely be hit with at least one interest rate hike as well as a downturn in prices.
“If an interest rate increase does happen in the first half of the year, there is a strong possibility we could see a second interest rate increase later in the year, which could dampen prices for a while.”
While property spruikers like to tell you that property always increases in value, there are periods of downturn, which can catch out investors, forcing them out of the market.
There is simply too much political and economic uncertainty around for negatively geared investors with a mid-range income to be taking on more expense, says Hutton.
They could be hit hard and could struggle to meet any rise in interest rate commitments, rental vacancies or unexpected repairs. He recommends these investors focus on how any increased holding costs will affect their ability to meet their mortgage repayments.
“Over-extended borrowers are most vulnerable when lenders get nervous,” says Hutton.
He warns property investors about the temptation to use their portfolio’s paper capital gain as collateral to borrow more to invest in additional property, especially following the boom run in recent years.
“We have seen the number of first-time property investors increase dramatically in the last few years, and it follows that many negatively geared investors have yet to experience the impact of rising interest rates, both on markets and their own ability to service debt. For most new property investors, their experience has been to see an ever-increasing value in their investment, while at the same time holding costs have remained manageable,” says Hutton.
“They have yet to see the effects of tight credit and forced sales on property values and ability to service debt.
“Yet while many of these new mid-income investors are already fully extended, their positive experience so far could well tempt them to use paper profits to buy more property and increase debt further.”
He says that in the past five years or so, it’s been easy money in residential property with full rentals, increasing values and solid capital gains.
“However, if the foreshadowed rising interest rates do happen this year, the underlying risks in property investment will become very apparent. Experienced investors, especially those who have seen the effects of tighter credit before, are more likely to recognise the signs which say ‘sit tight and wait and see’, and will be less likely than newer investors to make further commitments.”
He believes the property market may be clearer for investors later this year.
“The more cautious could well be in a position then to pick up forced-sale bargains from the less wary.”