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Keeping an eye on construction: Why does it matter for investors?

If you are an investor, you might be reconsidering your investment strategy this year due to falling returns in certain
States. What’s happening, and how can you prevent it?
You might be having trouble finding tenants. Both Perth and Darwin have seen 4.1 per cent vacancy rates, which
means a lot of rental properties are sitting empty. Rental median rent drops are also being recorded in these cities,
making your yields a little lower than usual.
Wishing that you could see into a crystal ball to predict when these falls will happen? We’re no fortune teller, but there is one thing to watch in order to see this coming. It’s simple – keep an eye on building approvals.

But why building approvals?
The more homes there are, the more supply there is for renters. The more supply there is, the lower the demand, the more your asking rents have to reduce in order to attract tenants.

While building approvals are only a part of the construction process and supply chain, they are “a leading indicator of property investment due to the importance of this sector to the whole economy and employment” according to Harry Karamujic of the University of Melbourne in his paper on the subject.

In an article from Broker News, Managing Director of SQM Research Louis Christopher said: “[The asking rent fall] is…
a result of a combination of factors including the strong upswing in residential dwelling construction which commenced back in 2013 and will continue on into 2016.”
This increase in residential construction is a result of around 32,500 approvals from 2013 to 2014 between Western
Australia and the Northern Territory, according to the Australian Bureau of Statistics. With this huge surge in additional dwellings, it is unsurprising that the renting population of these areas are finding they have to pay less.
No matter where or when you invest, additional properties usually result in more supply and less profitability.

So what can investors do?
You keep an eye on building approvals. If you see an enormous amount in 2016, you might be seeing a far greater
supply and a housing market value fall in that area a few months or years down the line when the buildings are
finished. By taking a longer-term view, you are ensuring that your property investments remain viable for years to
come.
On the other hand, if you are looking for a first home loan, this extra supply could tip the market into your favour as a buyer.

Written by

Stephen Bonfield, the Managing Director, previously worked for one of Australia’s major home loan companies as an independent mortgage broker. Steve used this experience to set up his own mortgage broking company - a company that places customer needs at the forefront.

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