RP Data’s Cameron Kusher has produced a series of blogs recently warning about increased investor activity in Australia’s housing market. From this week’s blog post:
The housing finance data for October 2013 was released by the Australian Bureau of Statistics earlier this week and it showed an ongoing escalation in investment activity which is a potentially worrying development and one that APRA and the RBA will have a close eye on…
The value of investment loans is at a record high up from its previous high in September. It is important to also keep in mind that housing finance data only looks at finance commitments to local authorised deposit-taking institutions (ADIs). We hear a lot of talk about overseas investors and often that money is not sourced locally. Given this, the true amount for all investors could be much higher…
As a proportion of the $26.5 billion in housing finance commitments over October, investment loans accounted for 38.9%. Although this amount may not sound that substantial, it was the highest proportion of investment finance commitments since December 2003 (39.3%) and not all that far from the record high proportion of 41.2% in October 2003.
…as investment activity peaks (whenever that may be) it could be a precursor to a slowdown in overall capital growth conditions.
It looks as if much of the investor activity currently taking place is pure speculation on capital growth… As the above chart shows, both the annual rate of rental growth and rental yields are falling which will result in a lower rental return. This is highlighted by the fact that we have seen capital city gross rental yields fall from 4.3% a year ago to 4.1% currently, which is not particularly attractive from an investment return perspective without the capital growth.
Of course this heightened level of investment activity with little focus on rental returns is likely to result in an even greater number of negatively geared owners of investment properties… With investment activity currently so high and investors seemingly focused on capital growth it seems inevitable that the number and value of losses on residential investment properties is set to increase…
This heightened level of investment activity is also coming at the expense of first home buyers.
…there must be a sense that the high level of investment activity is to some degree locking potential first home buyers out of the market. The latest housing finance data shows that first home buyers and owner occupiers who are non-first time buyers have both recently started to increase their borrowing amounts… The data potentially indicate… buyers have a fear of missing out and are increasing their borrowings in order to enter the market…
If this trend continues it could be quite worrisome… [And] must surely now call for close scrutiny by both the RBA and APRA.
And in last week’s blog, Kusher raised the risk that opportunistic investors could exit the market en masse in the event that housing market conditions soured, potentially leading to greater price volatility:
…a potential future weakness for the market is that some investors may not necessarily be ‘committed’ to the asset class. Meaning that if value growth was to slow or start to fall are these investors invested in residential property for the long haul, or will they choose to exit the asset class just as quickly as they have entered? My opinion is that if they aren’t committed then there is potential risk associated in the future where a significant supply of investment grade units may come to market when investors may be looking to exit poor performing assets.
RP Data’s buy versus rent reports have shown that it is far cheaper to rent than buy in the overwhelming majority of locations across Australia. This suggests that the bulk of new investors are indeed negatively geared, which does increase the risk that they may ‘cut and run’ in the event that the housing market begins to sour and/or economic conditions deteriorate.
There is also the longer-term risk that baby boomers, who hold a significant chunk of Australia’s rental property, could seek to offload a large proportion of their investment homes once they reach retirement. After all, negative gearing is only attractive as a tax minimisation strategy when there is labour income to offset rental losses against. But, once one enters retirement and ceases working, they lose the ability to offset tax and negatively geared property investment loses its attractiveness.
