We are living in interesting times, aren't we?
After strong property price growth in our major property markets in 2023 and the first half of 2024, we are now moving to a period of slower capital growth.
The current market is creating two types of property buyers:
- Those who see it as an opportunity to take advantage of a short-term concern in confidence in our property markets, and...
- Those who will sit on the sidelines waiting for the situation to become clear
While periods of uncertainty and confusion create opportunities for investors who have a long-term focus, they also create two property sub-markets that are particularly vulnerable in fluctuating environments.
While these markets might look attractive on paper, they can present significant risks for investors.
As always, knowledge is your best defence against error so let’s have a look at these ‘worst markets’ and why they pose a risk to investors.
1. Off the plan apartments
Currently, a new wave of naive property investors is considering buying off the plan hoping to settle on their properties a year or two down the track when they hope property values will have increased substantially.
While buying off the plan isn’t inherently bad in every circumstance, the risks are often much higher, for several reasons.
Firstly, when you buy off the plan, you’re locking in a purchase price at what is meant to be the current market value of a dwelling that won’t be completed for a year or two.
Of course, you hope the property will increase in value during the construction phase and by the time it’s completed you have a little nest egg of equity already in place.
However, that’s not what has been happening over the last few years, and, disappointingly for the buyers, on completion, most off-the-plan properties are valued at considerably less than the contract price.
In my mind, you should get a discount for all the uncertainty that goes with buying a property that has not been completed, but instead marketing costs, agent’s commissions, developer’s margins, and GST add a premium to the price.
That together with the banks’ reluctance to lend as much on this type of property and you’ll need to be able to immediately front the shortfall between the lender’s revised mortgage amount and the purchase price.
Plus you’ll often find hundreds of identical apartments listed simultaneously for sale or lease which will only add fuel to the fire, potentially lowering values further.
As well over the last few years, the concerns about structural integrity have steered many investors and homebuyers buying off the plan properties
And if you purchased to sell at a profit, you might have to reduce your sale price just to stay competitive in a market flooded by investors with the same idea.
At worst, you might find yourself having to hold onto the property if there aren’t enough buyers in the market.
The fact that off-the-plan properties mainly appeal to investors rather than the deeper owner-occupier market, means that’s it’s a property sector to clear of at present ( in fact you're probably always better to steer clear of these properties.)
2. House and Land packages
For similar reasons, investors should tread carefully around house and land packages.
Sure there's been a large amount of activity in this segment of the sector of the property market fuelled by first home buyers taking advantage of the various incentives but these types of properties share the same vulnerable characteristics as off-the-plan apartments, in that values can fall during construction, leaving buyers with a gap to pay on completion.
In addition, while you’re getting a shiny new investment with great depreciation benefits, you’re also paying a premium price and don’t have the potential for value-adding to your investment. 
That means you’re relying solely on market movement to gain capital and earn equity which is unlikely because the demographic who buy in these locations are usually interest-rate sensitive.
And while they tend to be hard workers, young family’s wages tend to rise by CPI at best, meaning there is little momentum to push house prices higher.
Sure the outer suburban and more affordable end of the markets performed strongly when interest rates were very low a few years ago, but affordability is now becoming an issue as the locals have had little wages growth of the time when property prices have boomed.
In these locations, the residents don’t have more money in their pay packet to pay the higher prices the properties are now achieving.
More than that, inflation and the rising cost of living has adversely affected low-income earners to a greater extent than middle and high-income earners.
And as we move to the next stage of the property cycle there will be a flight to quality properties and an increased emphasis on liveability.
As their priorities change, some buyers will be willing to pay a little more for properties with “in liveable locations.
Those who can afford it will pay a premium for the ability to work, live and play within a 20-minute drive, bike ride or walk from home.
How should you approach the current market?
As I've explained, this year we'll experience a flight to quality with well-located A-class homes and investment-grade properties still selling well, but secondary properties having trouble finding buyers.
- Also read:Melbourne property market forecast for 2025
- Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2025
- Also read:The 8 Best Property Investment Strategies in Australia
- Also read:Adelaide housing market update | December 2024
In essence, there are much safer options available than purchasing off-the-plan properties and house and land packages; ones that aren’t so vulnerable to changes in market conditions. 
I prefer to buy established family-friendly apartments, townhouses, or houses in the inner and middle-ring suburbs of our capital cities where there is a strong demand from affluent owner-occupiers who can afford to and are willing to, pay for them.
These properties tend to have the essential pillars of growth: near great infrastructure and transport, proximity to large job centers, the ability to purchase at fair market value (rather than at a premium), and the option to “manufacture” growth through improvements.
Without a flood of similar properties on the market, as is common with new developments, competition amongst buyers and renters will drive prices and rentals.
This is a foundational growth factor that can be absent in off-the-plan markets.
For me, there are too many risks currently in the off-the-plan and new house markets for property investors.
What does this mean for you as a property investor?
Later this year I see the market moving to the next phase of the property cycle when interest rates start to fall later this year.
In general when interest rates decline, the market tends to experience a surge in activity.
More buyers can afford larger loans, and as demand escalates, property prices often soar.
Buyers who were previously priced out of the market start to re-enter, and those on the sidelines rush to buy before prices climb too high.
This creates a snowball effect that can rapidly drive up property values in growth markets.
However, here's the key takeaway: waiting for rates to drop might mean missing out.
Throughout last year, despite relatively high interest rates, in some areas property prices grew at double digit rates.
There are always markets within markets—while some areas may cool down in the first half of this year, others will still experience growth.
This highlights the importance of looking at data-driven insights and short-term pressure indicators.
I see the current market offering a window of opportunity for property investors with a long-term focus.
We have what someone would call a "perfect storm" of factors that will lead to strong property markets over the next couple of years:
- Continuing strong population growth
- A shortage of skilled labour
- A massive shortage of housing
- Inflation is coming under control, and will soon be within the Reserve Bank's target range
- Interest rates are set to fall
And when rates do start to fall and buyer and seller confidence returns... the property cycle will move to the next stage.
So as I said, I see this as a window of opportunity for those who are financially in the position to buy their next home or investment property.
Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred two years ago in early-2023.
But if the market hands you an opportunity like this, why not take advantage of it?
Taking advantage of the upturn stage of a property cycle has created significant wealth for investors in the past.
Moving forward, demand is going to continue to outstrip supply for some time to come as we experience strong levels of immigration at a time when we’re just not building anywhere as many properties as we require.
At the same time, the cost of construction of delivering new dwellings will keep increasing not only because of supply chain issues and the lack of sufficient skilled labour but also because builders and developers will only commence new projects if they are financially viable and currently new projects will need to come on line at considerably higher prices than the current market price,
And consumer sentiment will rebound when it becomes clear that interest rates are falling, and pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
We are also going to be experiencing a prolonged period of strong rental growth - the rental crisis will only worsen further, with no end in sight.
Now I'm not suggesting taking advantage of tenants, what I'm suggesting is to recognise there is currently a problem (lack of rental accommodation) and provide a solution.
So rather than trying to hunt down a bargain, focus on buying an investment-grade property in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices… Plus they’ll hold their value far better in the long term.
While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.
