The best places to invest in real estate right now
Investment opportunities are still abundant in a slowing market and PropHero’s data-driven approach finds the best properties
There is a well-known principle in real estate investing – it’s all about location!
Making a profit from your investment means buying the right property in the right location where there is good long-term potential for capital gains and solid cash flows along the way.
No one can predict the future with certainty. However, what is possible – and what we offer at PropHero – is a data-driven screening process informed by AI predictive models.
Working with us, you can confidently tune out the noise.
Right now, with interest rates increasing, and the property market softening in many places, it’s not safe to assume that just because you own property it will be a profitable investment.
If recent property market data is an indication, identifying what’s hot – and what’s not – requires investors to think carefully about where they buy, particularly if they are attracted to Sydney or Melbourne. Many investors are shifting focus to cities such as Brisbane and Adelaide as well as some regional areas.
The data tells the 2022 story year-to-date
CoreLogic’s Home Value Index (HVI) for May shows that while values continued to grow across most major cities and towns, nationally momentum is slowing, with Sydney and Melbourne continuing to slide. Canberra too, after nearly three years of consistent positive growth, saw a marginal decline in May.
The overall HVI for the nation as a whole was down -0.1% for May, the first monthly decline in the national index since September 2020.
Now, after the Reserve Bank’s jumbo 50bps interest rate hike at the start of June following closely on the heels of its 25bps increase in May, what’s clear is that the sharpest declines are being seen in Sydney, Melbourne and Canberra, while Brisbane, Adelaide and Perth remain in positive territory.
As PropHero’s co-founder Mickael Roger says:
“We’re seeing a split in the market. On the one hand, there are the over-priced, low yield areas with flat rental returns, which are unattractive for investors and too expensive for owner-occupiers. And then there are the prime investment areas where prices are much lower, vacancy is less than 0.5%, land is limited, and a solid level of economic growth is being seen. This is where both owner-occupiers and investors still want to buy, and it’s driving prices and rents up.”
While high inventory levels, lower auction clearance rates and extended sales cycles can offer the opportunity for investors to negotiate with struggling vendors in Sydney and Melbourne, shrewd investors need to weigh the pros and cons carefully, and may decide to look elsewhere for investment wins.
“PropHero has been ahead of the curve here. We know that Sydney and Melbourne are not producing the returns our clients want and, as a result, we’ve exercised caution in these markets for close to a year.”
Brisbane and Adelaide are winning
The fact that cities like Brisbane and Adelaide are defying the downturn makes them interesting for smart investors.
This graph shows the quarterly change in property prices in Brisbane and Adelaide versus the other capital cities, according to CoreLogic data.
Quarterly changes in capital city property prices (CoreLogic)
For many strategic investors over the past few decades, it’s Brisbane’s strong economic performance and population growth that has led to excellent long-term capital gains. And now there is the positive impact of the 2032 Olympics which may also have a halo effect on southeast Queensland.
And Adelaide, although often overshadowed by its eastern counterparts when it comes to property investment, presents a great option in its own right. The city has a growing economy and a busy pipeline of infrastructure projects, making it an excellent place to invest in property over the long-term.
Overall, Brisbane and Adelaide offer lower entry-level purchase prices, higher yields, and potential for higher capital gains over the medium- and long-term.
Rents are rising
One source of comfort for investors, in areas where capital growth has slowed, is the increasingly tight rental market which is providing a hedge to rising rates. Against the backdrop of very low vacancies, rents are rising, and this gives investors extra cash flow to offset interest rate rises.
According to CoreLogic’s HVI, the annual change in rents is now tracking at 8.8% across the combined capital cities and 10.8% across the combined regions. Unit rents are rising at a faster annual pace than house rents.
This next chart underscores why we really like investing in Brisbane and Adelaide. This is the annual increase in rents in Brisbane and Adelaide in the areas PropHero targets, according to SQM.
Annual rent increase in PropHero areas (SQM)
Property developers are feeling the squeeze from rising input costs and interest rates
Statistics show that pandemic-related supply chain disruptions and a rapid jump in new builds and renovations is making the cost of new properties skyrocket. The unprecedented spike in construction costs has even outpaced CPI increases.
Given those supply chain issues – including a global timber shortage – as well as a tight labour market and rising interest rates, property developers are getting squeezed.
For the selling prices of new-build properties, this can go either way. To hit their pre-sales targets, some developers may be offering bargains. However, it’s much more likely that the selling price of off-the-plan dwellings will have to go up for the developers to keep a positive profit margin.
For anyone looking to buy land and build a new property, the pros and cons must be weighed up carefully. When comparing building a new property, or investing in an existing one, economic uncertainty and rising input costs are likely to be a significant deciding factor that favour buying an existing property.
As a general rule, for an investor, you have to pay a premium for a new-build property which you may not earn back via incremental rental returns and capital gains versus other available properties.