“In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets” – Wikipedia
2014 has been a strong year for the property market and we have entered 2015 with some substantial momentum. According to RP Data dwelling values are 8.5 per cent higher compared with a year ago across the combined capitals.
While most experts believe 2015 will be a healthy year, it is hard to see it being as good as in 2014 – particularly in the locations that have performed so well lately.
So, what do you advise your clients to do to compound the profits they have made?
One option is to free-up equity built in property markets that have enjoyed growth and to use this equity to invest in locations due to enjoy growth – in other words seek an arbitrage opportunity.
If your client has a property in Darwin, Perth, Sydney or Melbourne they may ask you to increase their loan so that they can withdraw some cash to be used as a deposit for another investment property.
RP Data recently identified Brisbane, Adelaide and Hobart as the markets where there has been some acceleration in the rate of capital gain over the past year. These are likely to be the cities to watch for a stronger performance over the coming year – where your clients may enjoy making the most of the profits they have already realised interstate.
Let’s take Hobart for example. The median listing price for a house is $460,000. If your client increases their loan on, say, a Sydney property by as little $40,000, they will have enough cash for their five per cent deposit plus costs. And with rental yield around five per cent and interest rates around 4.75 per cent, such an investment should not cost your client a bean.
But it gets better, there are now eight economists predicting a double drop in interest rates in 2015. If interest rates are, say, 4.25 per cent and rental yields remain at five per cent, your clients will be happy as Larry.
Of course, the information in this article is general in nature. It does not take into account client objectives, financial situation or needsand should not be seen as advice – that’s your job.