Why investors add volatility to the housing market

The latest CoreLogic Pain & Gain Report shows that a much higher share of investors sold their properties for a loss over the June quarter than owner-occupiers:

As shown above, nearly one-in-five investors across Australia’s capital cities made a loss in the June quarter, versus just over one-in-ten owner-occupiers.

According to CoreLogic:

If home values fall, investors may be more inclined to sell at a loss and offset those losses which in turn could result in more supply becoming available for purchase at a time in which demand for housing remains below average due to recent weak conditions and tighter credit availability however, these trends have started to reverse over recent months.

In truth, negative gearing was always primed to be pro-cyclical and add volatility to the market.

First, investors are more prone to be fickle and to cut-and-run than owner-occupiers, whose primary objective is shelter and who typically buy for the long-term.

Second, losing money via negative gearing is akin to paying your property a dividend in the hope that it repays you with capital growth.

Running a negative carry is a strategy that can only work financially in a rising market. And with prices falling until June, along with rising investor mortgage costs associated with the interest-only mortgage reset, it made sense for financially stretched investors to bail-out in order to stem the losses.

The Australian Treasury explicitly acknowledged the inherent volatility of investors earlier this year:

“Where around two-thirds of housing investors are negatively geared, these investments are implicitly predicated on expectations of capital gain in the future”…

“Should these expectations be reconsidered in light of the recent declines in prices or increased difficulty in rolling over financing, such as under the interest-only mortgages preferred by housing investors, investor sales may put additional downward pressure on prices.”

Investor finance has also shown much bigger boom/bust cycles than owner-occupied finance:

Comments

  1. “Running a negative carry is a strategy that can only work financially in a rising market.”

    It’s not all about home prices.

    Rents + intetest rates factor into the equation and many investors have seen these play out in their favour over the last few years. A property that was negatively geared a few years ago could be positively geared now.

    • So imagine the horror scenario keeping the pollies up at night where increasing vacancy rates cause rents to go down. It’ll make less sense for new investors to jump in and even shift the posts in the rent or buy decision.
      There can be only one resolution. Open teh gates.

  2. I’m staggered there wasn’t more downward pressure on prices given this fact. Perhaps the next leg down will trigger the avalanche.

  3. A local real estate agency here does an occasional “state of the Darwin market” video. The most recent one said properties between $200 – 400k were selling but divided them into tier one and tier two properties.

    – Tier one properties were generally rentals with a distressed investor. The property often needed repairs or maintenance and the owner could not afford to make them.
    – Tier two properties were often owner occupied and in a much higher state of repair. Cleaner, better gardens, newer paint, tiles etc. As they live in the property, the owner is both emotionally and financially invested in the property and it shows.

    The sellers of both tier one and two properties are often asking similar prices.
    For buyers, the tier two properties are obviously more attractive – less work and less expense.

    Investors are not as emotionally hung up on their rentals. They are more prepared to take a hit on that, than the family home.