Much has been said about the rise and rise of Australia’s residential property market.
Common reasons behind the surge in property prices around select major cities include Australia’s net migration, record-low interest rates, overseas buying and continued growth in the economy.
However, some key players appear concerned.
Most recently, we have seen the major banks up their interest rates on investor loans, and Bendigo and Adelaide Bank Ltd (ASX: BEN) has already raised its rates on owner occupier loans.
But it is not just residential homeowners and investors that should be concerned.
The returns of commercial properties could be expected to slow in the next 12 to 18 months, according to PricewaterhouseCoopers (PwC). Quoted by Fairfax, PwC suggest we could be near the top of the cycle given the potential for a tighter spread between interest rates and capitalisation rates, as interest rates rise.
For investors in real estate investment trusts (REITs), the effects of both a toppy share market and property market could combine to place further pressure on returns. Despite yielding decent returns over the past few years, Scentre Group (ASX: SCG) and BWP Trust (ASX: BWP) trade at premiums to the value of their assets and, therefore, could be more sensitive to changes in interest rates and the economy.
The likelihood of falling apartment prices around the country will have some investors and property developers on their toes.
Nonetheless, most residential developers have enjoyed strong gains over a number of years, especially those focused around the cities of Melbourne and Sydney. As a result, shares of Mirvac Group (ASX: MGR) and LendLease Group (ASX: LLC) are valued highly by the market. Ultimately, they are likely to be heavily discounted by investors if we witness signs of a slowdown in Melbourne or Sydney property prices in 2017.
No one knows for sure which direction the property market is headed and there are pockets of opportunity all over the country.
However, given the unprecedentedly low interest rates, record-high share markets and valuation concerns in Australia’s two major property markets, it is more important than ever to ensure you are well diversified.
Further, it may be time to reconsider using leverage to up the ante on higher property prices and find other sources of tax-effective income.
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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