---
title: "Why Rising Property Prices Are Actually Dangerous for Most Investors"
description: "Property prices keep climbing, but investors keep blowing up. After 350+ transactions across Melbourne, I explain why rising markets create more casualties than falling ones."
author: Joey Don
date: 2024-05-09
category: Suburb Analysis
url: https://premiumrea.com.au/blog/rising-prices-hidden-dangers-property-investors-melbourne
tags: ["property risk", "Melbourne market", "refinance danger", "cash flow", "investment strategy", "suburb selection", "property crash"]
---

# Why Rising Property Prices Are Actually Dangerous for Most Investors

*By Joey Don, Co-Founder & CEO at PremiumRea — 2024-05-09*

> Everyone assumes a rising market means everyone wins. That is dangerously wrong. I have watched investors with five properties go bankrupt during a boom, while first-timers with one well-chosen house sailed through unscathed. The difference was never about timing the market.

I have been watching property investors blow themselves up for over a decade now. And here is the pattern nobody talks about: the explosions almost always happen during a boom, not a bust.

Sounds backwards, right? You would think falling prices are what kill people. But that is not how it works in practice. In my experience across 350-plus transactions in Melbourne's southeast corridor, the investors who get into serious financial trouble — forced sales, marriage breakdowns, sleepless nights — they overwhelmingly got there during a rising market.

The reason is simple, and it has nothing to do with property fundamentals. It has everything to do with human behaviour when asset prices are climbing.

## The refinance trap that nobody warns you about

Here is how it typically plays out. I have seen this exact sequence at least thirty times.

An investor buys their first property — say a $650,000 house in Cranbourne or Hampton Park. Good area, strong rental demand. The house appreciates to $720,000 within eighteen months. The investor goes back to the bank, gets a desktop valuation, and refinances. They pull out $50,000 or $60,000 in equity and use it as the deposit for property number two.

Property number two starts appreciating. The investor repeats the process. By year three, they have got three or four properties, all cross-collateralised, all purchased with extracted equity rather than saved cash.

On paper, they look brilliant. Total portfolio value of $2.8 million. Real equity of maybe $400,000.

But here is what the spreadsheet does not show you: the combined weekly holding cost. If those properties are returning 3% gross yield through standard single-tenancy rentals, and the investor is paying 5.5% to 6% on interest-only loans, each property is bleeding roughly $200 to $350 per week in negative cash flow [1].

Four properties bleeding $300 per week each is $1,200 per week out of pocket. That is $62,400 per year, on top of your normal living expenses. Most households cannot sustain that kind of burn rate, especially when rates move.

I had a mate — not a client, a personal friend — who built exactly this kind of portfolio during the low-rate era. Two properties in Melbourne, one in Perth. When rates climbed, his monthly repayments jumped by about $3,200 across the three loans. He could not refinance because the banks had tightened their serviceability buffers. He ended up selling the Perth property $50,000 below what he reckoned it was worth, just to stop the bleeding.

He did not lose money because the market crashed. He lost money because the market was rising and he kept reaching for more.

## Why suburbs matter more than ever in a hot market

When prices are climbing everywhere, it feels like location barely matters. Everything is going up! But the data tells a completely different story once you look at what happens over a five-to-ten year window.

Our team tracks land value ratios obsessively. That is the percentage of a property's total value that comes from the land itself, not the building sitting on it. We insist on a minimum 80% land-to-total-value ratio for every acquisition we recommend [2].

Why? Because buildings depreciate. Full stop. A brand-new four-bedroom house loses value from the day it is built. The land underneath is what appreciates over time. And not all land appreciates equally.

Take two suburbs I know intimately: Hampton Park and a growth corridor further out. In Hampton Park, we bought a property at $590,000 on a 600-plus square metre block. The land value was roughly $480,000 — that is 81% of the purchase price. The house was falling apart, frankly. White ant damage, roof leaking, foundation cracks. We renovated it with our in-house team, and it now rents for $850 per week [3].

Compare that to a house-and-land package in a new estate further out, same $590,000 price point. The land component might be $220,000 — barely 37% of the total. The house is worth $370,000 new, but it will be worth $280,000 in ten years. The land might appreciate 3% annually in a growth corridor with unlimited supply. In Hampton Park, established land with no new supply available has been growing at 7% to 9% annually.

Both properties cost the same. One is an asset. The other is a slowly deflating balloon with a mortgage attached.

In a rising market, this distinction gets completely blurred. People see both properties going up and assume they are equivalent. They are not. When the market flattens — and it always does eventually — the land-heavy property holds its value while the building-heavy one stalls or drops.

## The three investor profiles that blow up during booms

After watching this cycle play out multiple times, I have identified three distinct profiles of investors who get into trouble during rising markets. Every single one thinks they are being smart.

**Profile 1: The Serial Refinancer.** This person treats their property portfolio like an ATM. Every time a property goes up $50K, they are at the bank extracting equity. The problem is that each refinance increases their total debt and their monthly repayments, but does not increase their rental income by the same margin. They are essentially converting unrealised capital gains into realised debt. It works until rates move, a tenant leaves, or a bank tightens their serviceability calculation.

**Profile 2: The Package Buyer.** This person buys house-and-land packages, off-the-plan apartments, or anything with a "guaranteed rental" for two years. The guaranteed rental is always inflated above market rate to make the numbers look good at purchase. When the guarantee expires, the actual market rent is 15% to 20% lower. The building has already depreciated. And they discover there are forty identical properties on their street competing for the same tenants [4].

**Profile 3: The Wrong-Suburb Speculator.** This person buys in mining towns, regional centres with volatile employment bases, or high-supply growth corridors — all because "prices are going up." Prices go up in these areas during booms because of momentum, not fundamentals. When the momentum stops, there is nothing underneath to support the price. No land scarcity, no population pressure, no infrastructure investment.

All three profiles share one thing in common: they are optimising for capital growth without any attention to cash flow. And cash flow is what keeps you alive when conditions change.

## What actually protects you in a rising market

I am going to be direct about this because I think the industry does investors a disservice by only talking about growth.

The single most important metric for long-term survival is not how fast your property appreciates. It is whether your rental income covers your holding costs. Everything else is secondary.

At PremiumRea, we have completed more than 350 transactions across Melbourne. Our target is to get every property to a gross rental yield of 5% to 8% through strategic renovation — not by buying in dodgy high-yield areas, but by buying in strong capital growth suburbs and then physically transforming the rental potential of the building [5].

A concrete example. In Narre Warren, we acquired a property for $762,000 on a 600-plus square metre block. Within four months, the bank valuation came in at $845,000 — that is $83,000 of appreciation without doing anything unusual. But here is the part that actually matters: the property generates $935 per week in rental income because it was set up with a granny flat configuration that allows dual occupancy. That is a 6.4% gross yield on purchase price [6].

If interest rates climb another 100 basis points, this property still washes its face. If a tenant leaves for two weeks, the other dwelling is still generating income. If the market drops 10%, the owner is not forced to sell because the rental income covers the mortgage.

Contrast that with an investor who bought a $762,000 property returning $450 per week in a single-tenancy arrangement. That is a 3.1% gross yield. At current rates, they are losing money every single week. A rate rise, a vacancy, an unexpected repair bill — any of these could tip them over the edge.

Same purchase price. Same suburb, even. Completely different risk profile. The difference is entirely in how the property is structured to generate income.

I will say this plainly: if your investment property is not generating enough rent to at least break even after interest and holding costs, you are gambling. You are betting that capital growth will bail you out before your cash runs dry. Sometimes that bet pays off. But I have seen enough people lose that bet to know it is not a strategy — it is hope with a mortgage.

## The cash flow test I run before every purchase

Before we commit to any property for a client, I run what I call the "rate shock test." It is straightforward.

I model the property at the current interest rate plus 200 basis points. So if rates are 5.5%, I model it at 7.5%. Then I ask: at that higher rate, with the renovation or conversion we are planning, does the rental income still cover the mortgage and all holding costs?

If the answer is no, we do not buy it. Full stop.

Holding costs in Victoria for a $700,000 to $800,000 property run roughly $6,000 to $7,000 per year — that covers land tax ($2,000), council rates ($2,000), water ($650), and building insurance ($1,500) [7]. These are non-negotiable costs. They exist whether the market goes up, down, or sideways.

Adding those costs to your mortgage interest gives you your true break-even rental figure. If your property cannot hit that figure after a sensible renovation, it is not a good investment at that price — regardless of what the growth forecasts say.

I bought my own investment properties in areas where I could achieve this. Hampton Park, Cranbourne, Narre Warren, Berwick. Not because they are glamorous. Because the numbers work. A $590,000 house that rents for $850 per week after renovation is generating 7.5% gross yield. That is the kind of buffer that lets you sleep at night when the Reserve Bank makes an announcement [8].

## What I tell clients who want to buy their fifth property

They come in buzzing. Market is up. Their existing portfolio has appreciated. The bank is willing to lend more. They want to buy number five.

And I ask them one question: what is your total weekly cash flow position across all four existing properties?

If the answer involves words like "roughly" or "I think" or "my accountant handles that," we stop right there. Because an investor who does not know their exact cash flow position has no business adding more leverage.

The difference between a portfolio that survives a downturn and one that collapses is almost never about the properties themselves. It is about the owner's financial awareness and their buffer. Our property management team runs at a 1:50 ratio — one dedicated leasing manager per fifty properties — specifically because we know how much detail matters in keeping rental income flowing without gaps [9].

A two-week vacancy costs roughly $1,700 on an $850-per-week property. If you have four properties and all four have a two-week vacancy in the same year, that is $6,800 in lost income. For an investor already running tight on cash flow, that can be enough to cause a cascade.

The investors who survive long-term are boring. They buy one property, get it to positive cash flow, sit on it for eighteen months, then buy the next one. They do not use equity extraction to leapfrog into the next purchase within six months. They let their cash reserves rebuild. They actually know what their properties are renting for and what their mortgage repayments are.

Rising markets punish impatience. I know that is counterintuitive. But it is the truth I have seen play out over and over again.

## Frequently asked questions

**Is it better to buy during a rising or falling market?**
Neither is inherently better. What matters is buying at a price where the rental income supports your holding costs. In a rising market, you pay more for assets but rents also tend to be higher. The danger is overpaying because of auction pressure or FOMO. In my experience, off-market acquisitions during rising markets give you the best chance of buying below inflated market expectations.

**How much cash buffer should I keep after buying an investment property?**
I recommend keeping at least $20,000 to $30,000 in accessible savings after settlement. This covers potential vacancies, unexpected repairs, and rate rises. If buying a property would drain your cash reserves below this level, you should wait and rebuild.

**What rental yield should I target to be safe?**
For Melbourne, I consider anything below 4% gross yield to be risky at current interest rates. Our target range is 5% to 8% gross yield after renovation. A property at $700,000 generating $800 per week is at 5.9% — that generally washes its face even with rate movements [10].

**Can I just rely on negative gearing to offset losses?**
Negative gearing gives you a tax deduction, not free money. If your property loses $10,000 per year in cash flow, negative gearing at a 37% tax bracket gives you $3,700 back. You are still $6,300 out of pocket. Negative gearing works best as a deliberate strategy for very high-income earners ($150K plus) who are buying high-growth land-heavy assets, not as a Band-Aid for a property that bleeds cash because it was a poor purchase.

## References

1. [Reserve Bank of Australia, 'Financial Stability Review,' October 2021. Discussed household debt-to-income ratios and mortgage stress indicators.](https://www.rba.gov.au/publications/fsr/2021/oct/)
2. [PremiumRea investment criteria: minimum 80% land-to-total-value ratio across 350+ Melbourne southeast transactions.](#)
3. [PremiumRea case study: Hampton Park property acquired at $590,000, 600+ sqm, renovated with in-house team, renting $850/week. Bank valuation $670,000 post-renovation.](#)
4. [Australian Housing and Urban Research Institute (AHURI), 'Oversupply in New Housing Estates,' Report No. 327, 2020.](https://www.ahuri.edu.au/research/final-reports/327)
5. [PremiumRea portfolio performance data: gross rental yields of 5%-8% achieved through strategic renovation across southeast Melbourne corridor.](#)
6. [PremiumRea case study: Narre Warren $762,000 purchase, bank valuation $845,000 at 4 months, dual-occupancy rental $935/week.](#)
7. [State Revenue Office Victoria, Land Tax Rates 2021-22. General rate threshold and calculation methodology.](https://www.sro.vic.gov.au/land-tax)
8. [CoreLogic, 'Quarterly Rental Review Q3 2021,' September 2021. Melbourne house rental yields and vacancy rates.](https://www.corelogic.com.au/news/quarterly-rental-review-q3-2021)
9. [PremiumRea property management: 1:50 dedicated leasing manager ratio. 40+ person team with Reno, Leasing, Renting, and Ongoing divisions.](#)
10. [Australian Prudential Regulation Authority (APRA), 'Strengthening Residential Mortgage Lending Standards,' October 2021.](https://www.apra.gov.au/strengthening-residential-mortgage-lending-standards)

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Source: https://premiumrea.com.au/blog/rising-prices-hidden-dangers-property-investors-melbourne
Publisher: PremiumRea (Optima Real Estate) — Melbourne buyers agent