Latest NewsBricks and Mortar Offer a Solid OptionFriday, 13 January 2017

With the Reserve Bank increasing interest rates again this month to 4.25 per cent and more increases on the way, it is important for investors to be aware of how these rate hikes will affect the market.

A key benefit of residential property as an investment asset is its stability relative to other asset classes, such as shares. Sharemarket values are subject to variations in investor sentiment, fuelled by the actual or predicted performance of companies. When investor sentiment is strong, the sharemarket rises. When it's shaky, the market falls.

Shares only exist on paper, so they can be created and issued quickly when companies need to raise capital. Investors can also sell them quickly when they need cashflow.

By contrast, residential property is a physical asset, so it can't be bought and sold easily. It can take weeks or months to sell a property, and even longer to build one because of land supply and planning restrictions. As a result, there are fewer residential property transactions and more stability in the overall residential market.

However, the fact that the residential property market is more stable than the sharemarket does not mean you can buy a property in any sector of the market and expect it to show the same level of resilience.

The proportion of debt relative to the number of owners can influence the stability of the market in particular locations. The more stable the market, the better the prospects for property investment.

Let's take a look at two Sydney suburbs. According to the Bureau of Statistics, 65.6 per cent of all owners in the relatively new outer north-western suburb of Rouse Hill are paying off debt on their properties.

By comparison in the southern suburb of Rockdale only 24.9 per cent of all owners are paying off a mortgage. With fewer Rockdale owners paying off a mortgage, they are less vulnerable to interest rate movements than their Rouse Hill counterparts.

Without a mortgage, they're less likely to be forced into selling their home if interest rates continue to climb or if they lose their job.

Rockdale and suburbs with similar homeowner debt levels represent a more stable and viable market for property investment than Rouse Hill and other suburbs with higher debt levels.

As interest rates continue to climb suburbs that have a lower exposure to non-tax-deductible debt will be more stable. By targeting these locations, investors will be well positioned to ride out changes in the national economy, and build capital growth over the long-term.  

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