Time to be wary for negatively geared investors: HLB Mann Judd

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Based on their experience over the last few years, first time property investors can be excused for thinking it’s all too easy, but change could be on the way, warns Michael Hutton, head of wealth management at HLB Mann Judd Sydney.

“2018 is likely to be a tough year for property investors, with most economists predicting at least one interest rate hike during the year, and a possible downturn in property prices.

“Negatively geared investors in particular should be very wary about taking on any more risk, especially those whose total income only just covers their lifestyle needs and investment holding expenses.

“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 both property and investment prices for a while.

“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, as they could struggle to meet any rise in interest rate commitments, rental vacancies or unexpected repair costs.

“Such investors should be focused on how any increased holding costs will affect their ability to service mortgage repayments.”

Mr Hutton said that there is always a temptation for property investors 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.

“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 warned that in the last five years or so, it’s been easy money in residential property with full rentals, ever-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 property investors to make further commitments.

“Things may be clearer for investors later this year, and the more cautious could well be in a position then to pick up forced sale bargains from the less wary.”

Mr Hutton said that while many believe that property always increases in value, there are always periods of downturn which can catch out investors, forcing them out of the market.

“Over-extended borrowers are most vulnerable when lenders get nervous,” he said.

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HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.