So, you’ve signed the contract, handover is complete, financing is in place, everything is looking good on your brand new, first ever Australian real estate investment
By Scott O. Talbot
Or perhaps you’re an old hand and this simply marks another shrewd addition to your bulging property investment portfolio. However, whether you be an intrepid new explorer into the world of property investment, or have navigated the metaphorical four corners of the real estate world, before getting too carried away with how your property investment will perform, we must analyse the global economics and the affordability factors in each city which will help to give key indicators on the health of the overall economy and social circumstances in that area, thus revealing the likely outcome of your investment.
Australian Real Estate
A favourite example of mine is Singapore. Property values have been doubling or tripling in unprecedented surges.
The pockets of investors have not been big enough to fit the cash that has been flowing abundantly. The question only remains then to be asked, is it stable? Well, lets look at the example of the localised economic balance on the affordability scale.
The average citizen earns $50,000 a year, about a $1,000 a week. In a balanced economy and social setting salaries are used equally in three areas. That is, 33 percent of income is used towards accommodation, a further 33 percent goes towards lifestyle and entertainment and in a truly balanced economic environment the remaining 33 percent is allocated towards savings (the extra 1 percent can be allocated upon discretion).
This is considered a balanced situation. When you get to the likes of Singapore, the property investors, real estate agents and speculators have inflated the market prices so much above the average income to the point where the average local can no longer afford to live comfortably. Accommodation costs now use up 70 percent and lifestyle remains at around 30 percent. Lifestyle will always be 30. People don’t generally eat less, not travel or deprive themselves of all luxuries and leisure. However, they will sacrifice any attempt to make savings. This is a bad state of affairs.
If you understand this principle of thirds, and if 33 percent is available towards rent by the majority of the demographics in which your property sits, then for the landlord it will ensure a fair rental return on the property.
Although possible to find accommodation for a third of that, 1,000RMB, the standard of quality is low. At that price you can only expect to get a room in a shared and overcrowded apartment and certainly in an older building.
Now, the Chinese are experts at wisely saving away the pennies, a quality which is greatly admirable, but it must be difficult for many on the average income wage bracket to do so, such is the high living costs.
So if you understand this principle of thirds, and if 33 percent is available towards rent by the majority of the demographics in which your property sits, then for the landlord it will ensure a fair rental return on the property.
In Melbourne, the range of roughly $333 per week is a per bedroom scale, so a two bedroom ought to be around the $700 mark. If the property is renting higher then it is out of the price range of the majority.
Take in to account whilst we have the 33 factor, like the Goldilocks story of not too hot, not too cold, there is some flexibility to increase the accommodation cost to 40 or 50 percent. This should be the exception, though, and not the rule.