Off the back of Australia’s biggest property market decline on record, first home buyers that previously felt getting into the market was out of reach are now starting to see that it is possible.
Some investors are also seeing the opportunity, and wondering if they should be trying to jump in and pick up a bargain.
But, at the same time we’ve seen the fastest interest rate tightening cycle in a generation, and rates are much higher than most Millennials have seen in their lifetimes.
So does buying a property make sense when the average mortgage interest rate is 6.77 per cent?
Owning an investment property, even with the high interest rates today isn’t nearly as expensive as most people think, with the average cost of owning an investment property worth $500,000 coming in at $14,641 per annum.
You might be wondering why on earth anyone would bother buying an investment property if it’s going to cost you almost $15k a year, and it’s a fair question.
The income and costs of an investment property are only one half of the picture – the other half is the growth in property values over time.
In Australia the long term growth rate of the average property is 6.3 per cent per annum. This means that the expected growth on a $500,000 investment property should average out around $31,500 per annum.
The numbers stack up nicely here – if you’re paying ~$15k for a $31k benefit, you’re ahead by over $16k every single year.
Calling out that these figures are based on some assumptions, and the past doesn’t necessarily predict the future.
But, you can see from the substantial annual benefit that there is plenty of room for you to still be way ahead.
When you purchase a property you’ll need to pay some initial costs like stamp duty, building and pest inspections, and legal costs.
These costs on average equate to around 5 per cent of the property value, which on a $500,000 property means $25,000 in initial purchase costs.
When you own an investment property you have to pay ongoing costs like strata fees for apartments and townhouses, or council rates for houses, water rates, insurance costs, property management fees, repairs and maintenance.
These costs tend to average out around 1 per cent of the property value, so for a $500,000 property this equates to $5000 each year in ongoing costs.
Then you’ve got your mortgage interest costs. According to data from Finder.com at the time of writing, the average variable mortgage interest rate in Australia is 6.77 per cent, which based on a 30 year mortgage of $525,000 (purchase price + costs) your annual mortgage interest is $35,903.
We’re currently in a period of peak interest rates, following the fastest rate tightening cycle in a generation.
Today, interest rates are significantly higher than their long term averages, meaning that the numbers we cover here are close to a ‘worst case’ scenario.
In the following example, I’ve used the average interest rate, but noting that by shopping around for a better deal you would be able to buy property with a much lower interest rate.
The sharpest variable mortgage interest rates at the time of writing are sitting at 5.64 per cent, significantly lower than the average rate.
If your investment property expenses are more than your rental income you receive, you can claim the difference as a tax deduction.
Based on Australian marginal tax rates, if your taxable income is above $45,000, your marginal tax rate + Medicare levy is 34.5 per cent.
When you own an investment property the benefits are twofold. You’ll get an income return through the rent paid by your tenants and receive a benefit from the growth in value of your property over time.
According to CoreLogic data, the average gross rental income on property in Australian capital cities as at September 2023 was 3.71 per cent, and as outlined above the long term growth rate on property is 6.3 per cent.
(news.com.au)
