As RBA keeps ultra-low rates, here’s some alternative property investment tips from a financial advisor
As expected, the RBA has just announced that it will keep its cash rate at an ultra-low 0.1 per cent until 2024, while reducing its bond buy-back program to $4 billion a week until November.
Since the pandemic began in early 2020, Australia’s central bank has cut its cash rate twice, and committed to a program of buying back 3-year government bonds.
The bank first cut its cash rate to 0.25% in March 2020, followed by another cut to 0.1% in November.
On the buy-back front, it has pledged to pump $200 billion of cash into the economy by purchasing $200 billion worth of the 3-year bonds over two rounds, which has now been extended to at least November.
To put this into perspective, Stockhead caught up with James Gerrard, a seasoned Sydney-based financial advisor and the founder of FinancialAdvisor.com.au, to get his views on what this latest development will mean for property investors.
Gerrard believes the RBA’s decision to continue its low rates policy for the sustainable future was a cautious move done to keep the economy stabilised.
He also believes the decision is a positive result for the Australian property market, which has been on fire recently.
Recent data from CoreLogic shows that Australian home prices are experiencing a boom not since the 1980s.
In June, national house values rose by 1.9 per cent, following a 2.2% increase in May.
Compared to a year ago, home prices nationally have surged by 13.5 per cent, driven by the ultra low borrowing rates, stimulus payments, and solid employment growth.
“Because of this, many property investors are starting to fast track or bring forward the sale of their properties to today, when they might have been thinking about selling over the next five years.”
“What I’m noticing is that prices aren’t falling, but they’re starting to stabilise because there is the same amount of demand but more supply coming through,” Gerrard said.
But in this scenario, wouldn’t property prices start to come down over the longer term?
Gerrard doesn’t think so, saying there will be more demand when our borders are open again to migrants, which will be a catalyst for further increases in the property market.
And the data backs his views.
According to the Foreign Investment Review Board, investments in Australian real estate from China – who were by far the biggest foreign investors in our property market – had declined significantly since the pandemic began last year.
The Chinese now rank as the third biggest investors in Australian real estate, behind the Americans and Singaporeans.
To catch this wave, some Australian investors have been eager to put their last dollar into the property market.
This has concerned Gerrard who said that many of his clients are borrowing as much as they can.
“They’re leaving themselves with very little cash reserves and very little margin of error, so if they lose their jobs and interest rates go up, I can see a lot of people going into mortgage stress,” he said.
Fortunately according to Gerrard, a lot of these borrowers are choosing fixed-rate option and locking in their mortgage rates, so even if RBA does hike rates, their mortgage payment won’t increase for a number of years.
But what about those investors who can’t afford to get on the property ladder in the first place?
Gerrard recommends an alternative and relatively new investment tool called ‘fractional investing’, using platforms such as BrickX, DomaCom, and CoVESTA.
Fractional investing is a way for investors to come together, much like a crowdfunding platform, and get exposure to a piece of real estate by just paying a fraction of the value.
On the BrickX platform for example, investors can choose from a number of real estate options for sale where the total purchase value is broken into 10,000 “bricks’.
Investors can then buy into these bricks, essentially owning a fraction of the real estate while earning rentals and any capital gains on the proportion that they hold.
Gerrard says this investment scheme holds particular appeal to younger investors, who otherwise would not have been able to afford a downpayment.
For ASX investors, Gerrard recommends his clients to buy a blend of REITs and property stocks.
“We use low cost index fund like the Vanguard Australian Property (ASX:VAP), which gives a broad market exposure,” Gerrard said.
“We will then tilt it and think about what type of commercial property will outperform the other types. Do we go for retail, office, or warehouse?” he added.
Following this analysis, Gerrard said he’s sold out of office type investments 12 months ago, as he realised early on that people were going to work from homes and that office buildings would struggle.
“We’ve used the money instead to buy into warehouse investments.”
In the warehouse space, Gerrard recommends his clients buy stocks like Goodman Group (ASX:GMG), Garda Property (ASX:GDF), and Centuria Industrial (ASX:CIP).
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.