Is it wise to buy an off-the-plan investment property during a recession?

Is it wise to buy an off-the-plan investment property during a recession?
Is it wise to buy an off-the-plan investment property during a recession?

Many investors are wondering whether now is a good time to invest in an off-the-plan property, given we’re in the middle of a recession. While the current economic conditions can be daunting, they can also offer the savvy investor opportunities. 

Here’s what investors should consider about investing in an off-the-plan property in today’s climate. 

Interest rates are at record lows 

During the recession in the early 1990s, interest rates reached a staggering 17.5%. Compare that to today when interest rates are at a record low 0.25% and you can see that not all recessions are alike. 

Low interest rates make investing in property much more affordable, which is a great opportunity for investors. 

Take the example of a family with a household income of $150,000 per year and $80,000 saved for a property. They could purchase a $550,000 investment property. With an interest only rate of 3% and a 4.5% rental yield, this property is likely to cost around $40 per week before tax. 

However, when we consider the potential tax benefits and the total deductions, the after-tax cash flow of this property is likely to be positive, at almost $88 per week. To put this into perspective, two years ago when interest rates were around 4.5% for investment properties, that same property would have cost you $8 per week after tax. 

Given the cash rate is so low and will take a while to rise significantly, investors can have confidence that holding an investment property will remain affordable for some time. 

Property prices are unlikely to fall substantially

The current recession has been met with a record level of government spending to keep people employed and stimulate the economy. So far the government stimulus has managed to prevent those who are unemployed from being forced to sell their homes which could lead to an oversupply and steep price falls. 

In many markets across Australia, a lack of supply combined with low interest rates, has led to plenty of sales activity. As a result, we’re yet to see significant drops. According to CoreLogic, in June property prices nationally only fell by 0.7%. Property prices actually grew slightly in Darwin, Canberra and Hobart in the same period.

As government stimulus is gradually lifted we may see more supply hit the market and therefore dips in prices in the short to medium term which will give investors an opportunity for a discount. However, we’re not likely to see prices plunge. Low supply and low interest rates are likely to prevent steep falls. Investors may be able to secure a discount while retaining confidence that their investment will hold its value, especially over the long-term. 

There are many areas of undersupply

Many areas across the country still have an undersupply of properties. In some cases this has been further exacerbated by would-be sellers postponing their plans to sell due to the current conditions. 

An undersupply can have a big impact on how that market performs. A good example is the Zetland apartment market compared to the Maroubra apartment market in Sydney. Over the last few years, Zetland has dealt with far higher levels of new property supply. This has significantly impacted the performance of that market by diluting potential growth. In contrast, the Maroubra apartment market has seen lower levels of supply brought to market resulting in the suburb outperforming Sydney’s average during the growth cycle and remaining stable throughout weakened market conditions.

But it’s important to remember not every market is experiencing an undersupply. The unique conditions caused by the pandemic have led to oversupply in some areas. Any areas that typically attract students, foreign investors or tourists may need to be avoided as they are likely to be experiencing an increase in supply, higher vacancy rates and decreases in rental prices. 

Investors should look to those areas with an undersupply, low vacancies and high demand from local purchasers. 

Owner occupier grade stock will continue to perform well

When selecting an off-the-plan investment, it’s important to be very selective and do your research. It’s best to look for developments targeted at owner occupiers. These will tend to be higher quality with better finishes, larger floor plans, and will be more attractive to tenants and any future purchasers. They are also less likely to be located in areas with an oversupply. 

Avoid developments solely geared towards investors. You don’t want to invest in an area where it is difficult to secure a tenant or where rental yields have been seriously impacted. 

Now is a good time to secure favourable terms

In the current environment, buyers are in a strong position to negotiate favourable terms in an off-the-plan contract. Work with the developer or your buyers agent to see if you can negotiate flexible terms which will reduce any risk to you such as the ability to exit your investment without penalty if your job situation changes in the future, a reduced deposit (for example 5% instead of 10%) or a 12-24 month rental guarantee. So long as these terms aren’t accompanied by an inflated selling price, the investor can really benefit.

Dominic Cavagnino

Dominic Cavagnino

Dominic Cavagnino is the Head of Research and Acquisition at Binnari Property, a team of independent property investment professionals, who specialise in researching and providing advice on residential real estate investment properties for clients. His understanding and knowledge of the market is backed by his comprehensive research and analysis of property market data, providing clients with access to the best property opportunities around the country.

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