What happens when investor demand stalls?

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By Leith van Onselen

Business Spectator’s Callum Pickering has posted a good write-up of the RBA Financial Stability Review’s discussion on Australian property. Included is the below warning by Callum about the strong build-up in investor demand, which has raised the risk of a significant fall in values at some point in the near future:

I’m concerned about what will happen when the demand from investors is exhausted. Low interest rates cannot encourage investors to bring forward their investment decisions indefinitely. We saw this firsthand for first home buyers after state and federal governments unwound the first home owner boosts following the global financial crisis.

Investors have been driving Sydney and Melbourne housing markets, but what will happen to prices when owner-occupier and first home buyers are required to fill the void? The answer is surely a significant decline in prices. This may not cause a crisis but will surely cause significant pain for households with high LVRs and low offset balances.

…the RBA should be more concerned about housing investment, particularly with regard to what will happen to house prices and net wealth when investor demand becomes exhausted.

Needless to say, I agree with Callum’s assessment.

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The current make-up of Australian mortgage demand is not conducive to sustainable house price growth. Investors, whose decision to purchase property are based on weighing-up alternative investment returns, are more likely to be fickle and cut-and-run as soon as conditions change, or more profitable opportunities are presented elsewhere. This places Australian housing on a more fragile footing than if demand was driven primarily by owner-occupiers, who tend to buy into housing for the longer-term.

Adding to these risks is the fact that most investors are negatively geared. In fact, according to the most recent ATO taxation statistics, 1.2 million investors (roughly 10% of taxpayers) were negatively in 2010-11, declaring losses on average of $10,900 per annum (see next chart). Accordingly, there is the ever present danger that many property investors could run into trouble in the event that there was a severe economic downturn leading to the widespread loss of jobs.

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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.