SQM: Property investor’s pile into falling yields

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From SQM Research’s weekly newsletter, comes the following thoughtful analysis of Monday’s ABS housing finance figures from SQM’s managing director, Louis Christopher:

On Monday, the Australian Bureau of Statistics (ABS) released its monthly update on national housing finance approvals. Over the years it has been a very reliable indicator as to the strength of buyer demand.

In short, buyer demand is now rising at a rather accelerated rate of growth, albeit from a very low base:

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The number of housing finance approvals excluding refinancing has now broken through its five year moving average (grey line) and is now back up to the point where based on our analysis, dwelling prices should rise by at least nominal GDP (the red dot).

So far, the rise has been driven by existing owner occupiers (perhaps looking to upgrade) and property investors.

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This makes this recovery separate from the last cycles of 2009 and 2001 where first home buyers lead the charge. Notably, in each of those years we had the introduction of the Federal and State First Home Owners Grant (2001) and then the First Home Owners Boost (2009). Unless something comes out of the Budget, there is no new Federal Government initiative this time round to entice first home buyers (FHBs).

I note in the media yesterday and some blogs, that the story was about ongoing shrinking FHBs. Yes, as a percentage of ALL buyers, FHBs had a lower share this month. That is because in absolute terms, existing owner occupiers and investors rose substantially.

However, it would be wrong to suggest or state that First Home Buyers reduced in numbers. No, they actually increased in numbers and this was the second month running. The increase was 11.3% from February, bearing in mind that these numbers are not seasonally adjusted.

I find it also very interesting that purchases of new dwellings rose 21.1% (seasonally adjusted). That’s a very large rise and finally fits with the HIA’s new home sales data that has been suggesting in recent months, more activity on new home sales, particularly in NSW where the grant for a FHB buying a new dwelling is at its greatest (up to $35,000 in total concessions). This has been good policy for the N.S.W State Government, which looks like it is now starting to pay off.

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When looking at the state break up in TOTAL housing finance approvals, we note there were rises across the board but most notably strong rises occurred in NSW, Victoria, Queensland and WA.

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Conclusion

A housing recovery is clearly underway and it has so far been driven by investors and owner occupiers. The recovery appears to be occurring in most states. I do wonder though, exactly what investors are buying into.

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On a capital city average, what is clear from the above chart is that rental growth is slowing. Rents on houses are up by just 1.0% for the year and have actually been falling a little over the past 90 days. Rents on units are only up by 2.5% for the year, though they have managed to records a slight rise of 0.5% for the past 90 days. When dissecting the data and looking at 3 bedroom houses and two bedroom units, both property types have recorded slight rent declines in recent times.

That’s a little bit of a worry for investors who have been jumping into this housing recovery. Basically they can forget about trying to lift the rent on day one. This is particularly the case if they have just bought in Canberra, Adelaide or Hobart where rents are currently on a downward trajectory.

And if first home buyers do indeed enter into the market at an increasing pace, that will likely mean even less renters in the near future (as they have turned into FHBs).

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.