A falling property market can create opportunities for investors, but a lower price does not automatically mean a property is a good investment.

In this episode of The CEO Breakdown, John Saade discusses weakening conditions across Australia’s major property markets, particularly Sydney and Melbourne. With auction activity softening, buyer sentiment weakening and property values coming under pressure, investors may be tempted to view falling prices as a chance to buy at a discount.

However, John emphasises the importance of looking beyond headlines and focusing on the fundamentals. A falling market can potentially provide better entry prices and rental yields, but investors still need to consider cash flow, rental demand, borrowing costs, property quality and the reasons behind the decline.

Before buying an investment property during a downturn, it is important to understand both the potential opportunities and the risks.

Is a Falling Property Market a Good Time to Buy?

There is no simple answer.

A falling market can provide investors with greater negotiating power and potentially lower purchase prices. Sellers may become more willing to negotiate, particularly when buyer demand is weak.

However, buying simply because prices have fallen can be dangerous.

A property that has dropped 10 per cent could fall another 10 per cent if the underlying factors driving the decline have not changed.

Instead of asking whether prices have fallen enough, investors should ask:

• Why are prices falling?
• Is the decline temporary or structural?
• Is rental demand still strong?
• What is the property’s realistic rental yield?
• Can the investment remain cash-flow sustainable?
• Is the property in an area with long-term demand?
• What could cause prices to recover?

These questions can provide a much clearer picture than the headline percentage decline.

Understand Why Property Prices Are Falling

Not all property downturns are the same.

Prices can fall because of higher interest rates, weaker borrowing capacity, reduced investor activity, economic uncertainty or an oversupply of properties.

Understanding the cause matters because some factors may eventually reverse while others could have longer-term consequences.

For example, if higher interest rates reduce borrowing capacity, a change in monetary conditions could eventually improve buyer demand.

On the other hand, a property located in an area facing persistent oversupply or declining demand may have more fundamental problems.

Look Beyond the Capital-City Headlines

Property performance can vary significantly between cities, suburbs and even individual streets.

The CEO Breakdown discussion highlights the contrast between Sydney and Melbourne. While both markets have experienced weaker conditions, Melbourne has been hit harder in some measures, potentially creating greater relative value for investors who focus on fundamentals.

This does not mean every Melbourne property is a bargain.

The same principle applies to Sydney or any other Australian market: the broader market trend is only the starting point for research.

Compare the Purchase Price With Rental Income

One of the most important considerations when buying during a falling market is the relationship between price and rent.

If property prices decline while rents remain relatively resilient, rental yields can improve.

For example, consider two hypothetical properties:

• Property A costs $1 million and generates $35,000 in annual rent.
• Property B costs $750,000 and generates $33,000 in annual rent.

Property B requires substantially less capital while generating a similar rental income.

This is why investors should not focus solely on capital growth forecasts.

Calculate the Net Rental Yield

Gross rental yield is useful for an initial comparison, but investors should also consider the costs associated with owning the property.

These may include:

• Property management fees
• Council rates
• Insurance
• Maintenance
• Strata fees
• Land tax
• Repairs
• Vacancy periods
• Loan interest and other financing costs

The resulting net return can be substantially different from the headline rental yield.

Assess Your Cash Flow Before Buying

A falling market can put additional pressure on investors who rely heavily on future capital growth.

If the property does not generate enough income to cover its costs, the investor may need to contribute additional cash each month.

Before buying, calculate how the investment would perform under different scenarios.

For example:

What happens if:

• The property remains vacant for several weeks?
• Interest rates remain elevated?
• Maintenance costs increase?
• Rental growth slows?
• The property’s value falls further?
• Your personal income changes?

Stress-testing the investment can help determine whether you can hold the property through a prolonged downturn.

Don’t Assume a Cheap Property Is a Bargain

A common mistake during a falling market is confusing a lower price with good value.

A property may be cheaper because buyers have identified problems that are not immediately obvious.

Before purchasing, investigate:

• Comparable recent sales
• Local rental prices
• Vacancy rates
• Planned developments
• Infrastructure projects
• Local employment conditions
• Population trends
• Property condition
• Body corporate or strata issues
• Council and zoning considerations

The goal is to understand whether the property is genuinely undervalued or simply declining along with its market.

Consider Your Investment Time Frame

Buying property during a downturn generally requires patience.

If your investment strategy depends on selling within a short period, further price declines could create significant risk.

A longer holding period can provide more time for:

• Rental income to increase
• Market conditions to stabilise
• Property values to recover
• Debt to reduce
• Equity to build

However, a long-term strategy does not eliminate risk.

Investors still need to ensure they can afford to hold the property if recovery takes longer than expected.

Consider Location and Property Fundamentals

A falling market can reveal which properties have stronger fundamentals.

Properties in areas with:

• Strong employment opportunities
• Transport infrastructure
• Schools and services
• Population growth
• Limited supply
• Strong rental demand

may have different long-term prospects from properties where demand is weak.

This is particularly important when markets are uncertain.

Rather than trying to predict the exact bottom of the market, investors can focus on purchasing an asset with characteristics that are likely to remain desirable over the long term.

Don’t Try to Time the Exact Bottom

Nobody can reliably know the exact day or month when a property market has reached its lowest point.

Waiting for the absolute bottom can also mean missing opportunities.

Instead, investors should establish a purchase price based on the property’s fundamentals and their own financial position.

If the numbers work today and the investor can comfortably hold the property through further market weakness, the investment may still make sense even if prices decline further.

Focus on the Numbers, Not the Headlines

Market commentary can change quickly.

One week may bring predictions of a major property crash, while the next may bring forecasts of a rapid recovery.

Rather than reacting to every headline, investors should focus on measurable factors such as:

• Purchase price
• Rental income
• Net yield
• Financing costs
• Cash flow
• Vacancy risk
• Local supply
• Long-term demand
• Tax implications

This approach can help investors make more rational decisions during periods of uncertainty.

Consider the Tax and Ownership Structure

Property investment is not simply a decision about which house or unit to purchase.

The way an investment is owned can also have significant tax and financial consequences.

Depending on the circumstances, investors may need to consider issues such as:

• Capital gains tax
• Rental income
• Deductible expenses
• Land tax
• Ownership structures
• Trusts and companies
• Future sale considerations

Tax rules can also change, meaning an ownership structure that worked previously may not necessarily remain appropriate.

Professional advice should be obtained before establishing or changing a property investment structure.

What a Falling Market Could Mean for Investors

A declining property market can be uncomfortable, but it can also force investors to become more disciplined.

When prices are rising rapidly, investors may focus heavily on capital growth and worry about missing out.

When prices fall, fundamentals become much more important.

This can create opportunities for investors who are willing to research carefully, negotiate effectively and focus on long-term value.

As John Saade’s discussion of Sydney and Melbourne highlights, a market that has performed poorly may deserve a closer look rather than an automatic rejection.

But the objective should not be to buy simply because something is cheaper.

The objective is to buy an asset at a price that makes sense relative to its income, risks and long-term potential.

Frequently Asked Questions About Buying Property in a Falling Market

Is it a good idea to buy property when prices are falling?

It can be, but falling prices do not automatically make a property a good investment. Investors should assess rental income, cash flow, location, supply, demand, and the reasons behind the decline.

Should investors wait until the property market reaches the bottom?

Trying to identify the exact bottom is extremely difficult. Investors may instead focus on whether a property’s current price and fundamentals fit their long-term strategy.

Can rental yields improve when property prices fall?

Yes. If property prices fall while rental income remains stable, the rental yield may increase. However, investors should consider net rental yield after expenses rather than relying solely on gross figures.

What is the biggest risk of buying during a downturn?

One major risk is that prices may continue falling after the purchase. Investors also face risks from vacancies, interest rates, maintenance costs and changes in rental demand.

Should I buy property because it is cheaper than it was a few years ago?

Not necessarily. A lower price may reflect genuine risks or weaker demand. Compare the property with recent comparable sales and assess its income and long-term fundamentals before purchasing.

Considering an Investment Property?

A falling market can create opportunities, but making the right decision requires more than simply finding a property that has dropped in price.

Latitude Accountants can help property investors understand the tax and financial considerations surrounding their investment strategy, including rental income, ownership structures and potential tax implications.

Latitude Accountants

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Disclaimer

This article provides general information only and does not constitute financial, tax, legal or property investment advice. Property markets and individual circumstances vary. Speak with a qualified adviser before making property, investment or financial decisions.