Rental returns that exceed the cost of the mortgage are set to trigger a recovery in the housing market.
The Australian has reported that due to official interest rate cuts, and years of foundering prices and rising rents means that investors can now buy properties in some parts of Sydney and Melbourne that will return about as much in rent as they cost in mortgage repayments.
Louis Christopher managing director of SQM research has stated that there is a real possibility that we will see positively geared properties emerging this year in the affordable markets of the Southern capitals. As there are only a limited number of rental properties available at the affordable end of the market rents will continue to rise in the sector in 2009, making property investments more lucrative.
The areas that would most likely experience the emergence of positively geared properties as rents continue to rise would be small inner-city apartments or cheaper outer suburbs such as Bankstown in Sydney's West Mr. Christopher reported.
Mr. Christopher further stated that Perth house prices were still losing ground and that southeast Queensland was over supplied.
In Sydney's inner-city Darlinghurst, a one bed roomed unit was advertised for sale yesterday for $275,000 with an estimated weekly rental return of $360. Before taking into account expenses such as strata fees or advantages such as depreciation tax breaks the weekly cost of holding the property based on 100% mortgage of the purchase price would be $372 a week.
Mr. Christopher then went on to suggest that rents were expected to continue to rise on affordable properties over the coming year but a surge in unemployment and a possible recession could have a major impact on the state of the rental market.
Future investors would need substantial equity before they could enter into the property market. Borrowing 100 per cent of the purchase price, on property especially small apartments was difficult even at the peak of the credit boom and was now almost impossible. Lenders were looking for larger deposits from borrowers to avoid costly mortgage insurance.
Research conducted by RP Data revealed that the median price of the top ten per cent of properties, based on price, had slumped in Sydney, Melbourne and Brisbane last year as the economic situation took a downturn.
Sydney was hardest hit with the top 10 per cent of properties dropping in value by 19.5 per cent, from an average $1.6 million to $1.29 million. In Melbourne, the top 10 per cent of properties dropped 15 per cent over the year, while the cheapest 10 per cent of properties rose in value by 4 per cent.
Affordable cheaper housing is encouraging first home-buyers to purchase cheaper properties rather than renting. Over the weekend 66 per cent of properties auctioned in Sydney were sold up from 53 per cent on the same weekend last year and there have been more potential buyers in recent weeks.