Will this boom become an investor bubble?
High price growth often motivates investors to buy properties in the expectation that the growth will continue or even escalate, so are investors about to jump on board and turn this boom into a price bubble?
Although the number of investors in the property market is growing, the percentage of investors buying property is around 30% of all buyers, still far lower than during 2014/15, when over 60% of all properties purchased in Sydney and Melbourne were bought by investors. There are several reasons why investors are not taking part in the current boom.
Firstly, investors tend to buy units rather houses. Around seventy percent of units and apartments are owned by investors, while the figure for houses is much lower at only twenty percent, as the graph shows.
Investors prefer units as investments, because they are cheaper to buy and traditionally offer higher rental yields than houses.
Despite Body Corporate fees, they also tend to have low maintenance and repair costs and are located in areas with the highest rental demand.
Inner urban unit rental demand has collapsed
The attractions of units for investment have been turned on their head due to international border closures, which have caused a collapse in rental demand from overseas migrants, tourists and students, especially in inner urban precincts where most units are located.
There are nearly three thousand unit rental vacancies in the Melbourne CBD alone, and asking rents have fallen by nearly twenty-eight percent in the last year. Sydney’s asking rents for units have dropped by more than eighteen per cent. So why have investors not turned to houses instead of units?
Investors have been attracted to other investment options
Secondly, although house prices have risen, they have not been matched by increased rents. Rental yields are at historical lows of just 2.7% gross rental yield in Sydney and only 2.9% gross rental yield in Melbourne. This makes any house purchase in these capital cities a heavily negatively geared proposition.
Investors have been drawn to other asset classes which may offer better returns than residential property, such as commercial property, commodities, gold and shares. Some investors seeking a faster-paced experience have turned to innovative opportunities such as the emerging cryptocurrency trading markets.
Could APRA pull down the shutters again?
Thirdly, investors are concerned that what took place during the last investor led boom could be repeated.
This boom occurred in Sydney and Melbourne from 2013 to 2015, when APRA, the statutory authority which regulates and supervises our major banks, was concerned that the market might overheat as most properties were being bought by investors.
APRA intervened decisively, restricting investor access to housing finance by cutting back the percentage of investor housing loans that the banks could provide. Although these tactics were broad based and blunt edged, they were effective in curtailing investor demand and housing prices in Sydney and Melbourne took a nose dive.
Property investors are now worried that APRA might intervene again, and that they will be in the firing line. APRA has already publicly stated that their trigger points are:
- Two years of over double digit property price growth
- The percentage of investors buying property exceeds 50% of all buyers
Given the state of the market at present, APRA intervention is highly unlikely, but if the percentage of investors does rise and we also experience two consecutive years of high price growth, APRA could step in again and apply brakes to borrowing.
This means that if investor interest in residential property starts to increase dramatically, APRA will take measures to slow it down again. But, if investors don’t rush into the market in the next year and cause prices to keep on escalating, then APRA won’t need to act. Either way, this makes a broad based investor led boom in our major property markets all but impossible.
CoreLogic published hedonic home value index
Unit rental vacancies and asking rents, Realestate.com.au
Lending Indicators, Australian Bureau of Statistics
Australian Community Profiles, Australian Bureau of Statistics