When the stock market experiences its worst run since the GFC it's no wonder many investors prefer property. Its virtue is that in a bad market, home owners tend to pull up the drawbridge and refuse to sell, disguising any fall in values.
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So although you can rule out property prices dropping 7.5 per cent in a day – as shares in ANZ did the other day – whether they can keep on rising in Sydney and Melbourne is the question.
Surely there's a natural limit where houses just become too expensive? Yes, but not while rates are so low, there's a building backlog, jobs are safe and the cheap dollar pulls in foreign buying.
And perhaps most of all, the sharemarket has seemed a non-event, though after taking dividends into account it's been doing far better than it looks.
Take Sydney because it seems the most bubbly and prompts all the hand-wringing in the Reserve Bank. Yet which is stranger: the double digit annual increases of the past three years, or the fact values were stable for the previous eight years and fell in real terms?
You can see the connection. Little was built when prices stagnated because developers couldn't see a buck in it – and were hard pressed to find labour, thanks to the mining boom – so there was no new stock for the increasing numbers of migrants.
Just last year NSW attracted more than 70,000 migrants but built only 20,000 homes, according to Andrew Wilson, Domain Group's senior economist.
This housing shortage, also shown by unusually low vacancy rates, will only slowly be filled by the building boom that's under way.
Melbourne had the opposite problem of a later but deeper slump, due to an oversupply of apartments but recently house price rises in the suburbs have been outstripping even Sydney.
If record low interest rates are here to stay then homes are affordable and jobs safe. The bond market, a usually reliable witness in these things, can't see rates rising for at least three years.
The market is "being driven by the very few alternatives for people who want to diversify or don't like the sharemarket", property expert John Wakefield says.
"There's the chance of a capital gain and roughly the same yield as a long-term deposit so why wouldn't you invest?"
Rental returns
The rental returns from property have rarely been higher and never so competitive with term deposits.
"The whole nature of property investing has changed. It will be driven more by yield than capital growth," Domain's Wilson says.
That's why you need to look beyond your own, er, backyard. Go bush or interstate and the yields reach 8 per cent in parts of Adelaide and Tasmania. Investing interstate also escapes land tax.
Even if property is becoming more a hunt for yield than capital gains, no doubt most investors would still expect some of those too.
Either way, the old rules about location haven't changed, especially being close to transport, having a growing population and jobs.
You want properties with potential, not ones you'd necessarily want to move into yourself.
"Look for things that need a spit and polish that will give you value, not something that's been milked already," says Wakefield.
Buying off-the-plan makes it easier but what you save on stamp duty can be more than offset by the developer's premium.
Besides, what Wakefield calls the "mass concrete block stuff" typically means at least one-fifth of the apartments are sold to investors so the chances are they'll be renting them out just when you're also looking for tenants.
"You're competing with too many others with the same logic," he says.
In Wakefield's experience, two-bedroom units are best because they attract young couples who are likely to stay put for a while before starting a family and buying their own place.
That's another thing. Property investing is becoming self-sustaining as investors push up prices, elbowing out first-home buyers who, with no choice but to rent or stay in the family home, provide a captive market.
That's why rents and prices are rising simultaneously, keeping investors in the game.
Wilson says recent auction results show Sydney's "prices growth is flattening" but tips rental yields will stabilise at 3.5 per cent to 4 per cent. Melbourne is seeing a price "resurgence".
Not even the banking crackdown on investors is expected to make much difference.
Rather, it's just squeezing out first time investors – a double whammy for the often frustrated would-be first-home buyers driven out of the market – but not those who already own a home.
"The reality is, most investors are already owner-occupiers and have a lot of equity in the home. They can use this to get their loan to valuation ratio down," says Tony Harris, principal of Easy Living Finance.
"You can secure an investment loan against an owner-occupied property and still claim the tax deduction on the interest," he says.
As for higher rates on interest-only investment loans, these can be passed on to tenants or absorbed by negative gearing. Metropolitan rental markets, apart from Perth and Darwin, are tight.
"I don't think the market will decline but I don't know how much more it will rise," says Wakefield.
But commercial real estate "is where people should go. Yields have moved up very strongly in the last couple of years and leases are much longer."
'I've lived in a building site for 25 years'
Buy a dump, live there while you renovate it yourself and you'll make a motza out of property, Dean and Sally Lewis will tell you.
Although only in their late 40s with two children, the couple have lived in seven houses at last count, renovating all but one which had risen so quickly in value they sold it anyway.
"I've lived in a building site for 25 years," Sally, who runs Events and Beyond, says.
Along the way they've tried a project home builder and even a short-stay accommodation unit though they'd never do either again because of the hassles and costs.
As for some of their tenants… well, you wouldn't want to know.
Dean bought his first six-unit block of flats in Geelong when he was 21 - before he became a qualified architect and builder. He did them up at night and sold them one by one while he had a day job at Village Roadshow. And that was when mortgage rates were a record 17 per cent.
"I lived in one, did it up and then moved to another," he says.
The block cost $60,000 and he sold each for about $250,000.
By doing the renovations himself, Dean keeps the costs well down.
Since he lives in the properties there's no tax on his sometimes spectacular capital gains either.
"I look for rundown places that I can add value to. I never buy someone else's refurbishment. The bigger the dump the better," he says.
He looks for properties in what he calls the "gentrification corridor" where there's population growth.
But serendipity plays a role too. The couple overpaid $20,000 on an inner city house bought over the phone by a friend on their behalf when they were on holidays. But after the magic touch, the $220,000 home in what was in "a very original condition" was sold for $750,000 four years later.
And the eight-unit block in Perth they snapped up when they saw it on the way to the airport has been such a rental success that 16 years on they still can't get in to renovate it. It's near a university, on a bus route, close to shops and opposite a park.
"They're mostly long-term tenants. One still pays his rent with a postal order," Sally says.
Their properties are funded by interest-only loans because Dean says "it lets me buy and sell without onerous paperwork."
Here they got lucky. A former workmate turned Smartline adviser, Julie Deppeler, re-financed his Westpac loan with Macquarie "which saved me $10,000 a year", Dean says.
Property investing isn't for the faint-hearted. They've had to evict bikies manufacturing ice "and we get calls on Christmas Day that the hot water has gone or somebody has been locked out", Sally says.
While their Byron Bay acreage "will be a place to put our feet up and grow avocados," according to Sally, Dean says "this will do me for a couple of years - but I'm always looking for a bargain".
'It's easy to get tenants'
Frustrated first-home buyers are getting a foot in the Sydney and Melbourne property markets through the backdoor.
Instead of living there they're renting their properties so the tenants help pay off the mega mortgage.
But Joseph Radd, a financial planner at Mortgage Choice, has gone a step further. The 29-year-old has bought a home in Sydney's west where he says "it's easy to get tenants". In fact, within a week of settlement he'd found someone.
His novel solution is to build a granny flat in the back as well.
"The frame went up last week. It'll be my home. I wanted assistance to pay off the mortgage," he says.
When he eventually gets married, Joseph says he and his partner will buy a home together and keep the property which will then have two lots of rents coming in.
Joseph saved furiously for the deposit using a high-interest online savings account "that I can't touch" although "the increase in prices was faster than I could save, so I wanted to purchase sooner rather than later".
But living at home kept expenses to a minimum.
He had no trouble getting finance since his brother-in-law is a mortgage broker, finishing up with splitting the mortgage between a five-year fixed-rate loan at just under 4.5 per cent and a variable, interest-only component.
