Investors help lift property market out of the slump
Historic low interest rates, cheaper prices, negative gearing tax deductions and eased superannuation rules are encouraging Australians to plough their money into housing.
Think back less than a year ago. Property prices across the country had been falling for nearly two years. Europe was in turmoil, and consumers weren't spending.
Then the Reserve Bank reacted, slashing interest rates by 75 basis points in just two months, forcing down mortgage lending rates from 7.4 per cent to 6.85 per cent.
Ten months later, Australia's housing market has been dragged out of the doldrums by a new wave of activity. House prices are edging up - even reaching a new high in Sydney - auction clearance rates are buoyant and interest rates are at historic lows.
But it's not first time buyers eyeing a plot in the green fields of Melbourne's newest suburb of Manor Lakes or upgraders looking for a terrace in Sydney's Annandale that are responsible for the market's new vitality.
It's investors. They have piled in, fuelled by historic low interest rates, cheaper prices, generous negative gearing tax deductions and relaxed superannuation rules.
Loans to investors have soared 16 per cent in the last year, Australian Bureau of Statistics trend figures reveal. Meanwhile, lending to owner occupiers - the traditional powerhouse of the market - grew at a far slower pace, just 6.6 per cent over that time.
More worrying, the value of loans to first home buyers fell sharply, down 16 per cent.
Over the same period since June last year, dwelling values started to rise again. Nationally they are up year-on-year by 2.7 per cent this month (unit values rose 2.5 per cent), say RP Data figures.
The growth has been consistent enough for many to call an end to the two-year-old property slump.
"That's the hardest, clearest evidence there is that the upturn has been driven predominantly by investors rather than by owner occupiers," Bank of America Merrill Lynch economist Saul Eslake says of the ABS February figures.
The upturn also reflects a shift in Australia's attitude towards bricks and mortar. We are slowly becoming a nation of property investors rather than home owners, new Tax Office records show. One in seven taxpayers now owns an investment property and one in 10 are negatively geared. On a proportional basis, property speculation is now twice as popular - and just as Australian - as belonging to your local footy club.
Negative gearing, because of its popularity, is a key drain on the public purse - the average investor claimed losses of $10,950 last year, up $1800 on the year before.
It prompted renewed debate this week about scrapping the incentive. "There is a better chance of Tasmania getting its own AFL team while Andrew Demetriou is in charge, than there is of negative gearing being abolished," says Eslake.
Those one-in-seven taxpayers have sensed an opportunity that other Australian mums, dads or young couples are still unwilling - or unable - to seize, perhaps because the market is still dogged by wild swings in sentiment and contradictory signals about its health.
"With sharemarket volatility and low interest rates, there's a lack of options so it's left investors to go back to what they know best - property," says MacroBusiness economist Leith van Onselen.
The economic gyrations of the post-GFC world have narrowed investors' options.
Many are hoarding cash in long-term bank deposits but as they reach maturity and new, lower interest rates begin to bite, investors are confronted with a choice - rollover or run.
These falling returns on cash deposits are accelerating a push into property by self-managed superannuation funds (SMSFs), observers say.
The breakneck pace of Australia's population growth is also playing a role. Melbourne grew by 77,242 people in 2011-12 - about 1500 a week. While slightly fewer people opted to live in the Harbour City, it nevertheless added a healthy 61,200 souls.
In theory, the more people that compete for housing, the more rents go up. But despite its strong surge of new residents, Melbourne's rental yields are among the lowest in the country - just 3.6 per cent for houses. It is anathema to investors. "Yields have been completely eroded in Melbourne - it's the lowest yielding city by quite a margin," says RP Data's Tim Lawless.
Houses have seen no rental growth for more than two years. And while apartments have fared slightly better - despite forecasts of oversupply - their 4.4 per cent yield is still low by the rest of the country's standards.
As a result, Victoria's population-driven home-building boom, once the pride of the nation, is now coming off the boil.
Sydney, on the other hand, is presenting investors with better opportunities.
Nowhere around the country, apart from Perth, is investing seen as a key to future prosperity quite like it is in Sydney. There, investors now account for more than half of all buying activity.
Unlike its southern neighbour, Sydney is still failing to match accommodation needs with supply. While yields officially sit at 4.3 per cent for houses and 5 per cent for units, canny investors are getting better returns by targeting dwellings where they can add value, says buyer advocate Rich Harvey, managing director of Propertybuyer.com.au.
"There's a pattern of re-emerging confidence in both the investor and home buyer market," he says. In suburbs like Blacktown and Liverpool, buyers are adding a granny flat on the rear of a property and achieving yields of 8 to 9 per cent on a $350,000 investment.
"It certainly shows where the energy is in the market right now," says Dr Andrew Wilson, chief economist with Australian Property Monitors. "It's becoming a market that's driven more by financial imperatives than housing imperatives."
Investors are attracted to Sydney's strong rental growth, particularly in outer suburbs such as Liverpool, Blacktown, Penrith and Hornsby - where rents are up 8 per cent a year.
That rent growth is now starting to translate to inner suburbs such as Chippendale and Paddington, figures show.
CBRE managing director David Milton, who specialises in the off-the-plan apartment market, says rising rents are creating a competitive tension between investors and owner occupiers in a market that's become defined by a shortage of stock.
"The demand for new accommodation in Sydney is very dramatic. Investors had become very conservative about off-the-plan stock after the GFC but we're now seeing them buying about 40 to 50 per cent of projects again."
But while Sydney leads the country, Melbourne remains an enigma. House prices fell 10.5 per cent in the peak-to-trough of the 2010-12 slump and, despite some recent gains, still remain 6.6 per cent below their peak.
Investors, like other types of buyers, are still struggling with the legacy of the city's "Golden Decade" when prices soared during three booms in 2003, 2007 and 2009-10.
Rents have not kept up, leaving landlords with low returns. "Anyone investing into the market is taking a long-term view and they are probably targeting those sub-markets where the yields are a lot higher than the metropolitan market and the price is such that they can expect capital growth," Lawless says.
Investors chasing capital growth now need to have at least $400,000 to spend to get an established apartment in inner city areas such as Northcote, Fitzroy, South Yarra, Williamstown, and Kew, according to buyer's advocate Monique Sasson Wakelin of Wakelin Property Advisory. "They've got a 50-year history of really, really strong performance. Investors who chase yields don't understand what residential property is all about and therefore they shouldn't be investing," she said.
Further afield, investors also face uncertainty. The famed boom towns of Australia's mining and resources sector - a magnet for high-yield seeking property investors - now face tougher times.
"These markets are coming into the spotlight now for a lot of the wrong reasons because they are so reliant on the resources sector," says Lawless.
"People have done very well out of them if they bought in around the first phase of the mining boom in 2006 but as the resources boom cools down we won't see as much demand and they won't see the same kind of appreciation and rents as they have in the past."
One of the earliest signs of the coming melt is the "clear" trend in rising vacancy rates in Perth and a number of mining towns, data firm SQM Research says.
In a recent note to clients, SQM's Louis Christopher says, "we are now watching the data very closely on the various mining towns in the country".
"Property investors over the past 10 years have done extraordinarily well if they held real estate in mining towns. However, there is always a risk that when a downturn arrives that these markets could have a very rapid and severe correction."
Vacancies in towns at the centre of the resources boom such as Gladstone, Karratha, Kalgoorlie, Roma and Port Hedland have been edging up recently.
"We're not sure what's causing it," Christopher says. "But given the rise, there must be cancellation of projects going on."
Mining town real estate agents say the fall in demand can, in part, be traced to companies providing their own accommodation for workers.
In Gladstone, the construction of camp-style housing for thousands of workers in the liquefied natural gas industry has pushed up vacancies and depressed rents in a market that has already experienced a residential building boom.
At the market's height in 2011-12, property prices pushed 20 per cent higher and rents more than doubled. A new furnished, two-bedroom apartment that once commanded $850 a week, now rents for $550 a week.
But with many properties still returning yields of more than 8 per cent, it remains a very attractive (but tricky) market for interstate investors, Gladstone agents say.
"There's still good demand except the returns have diminished from extremely high returns back to just good returns," says Elders Real Estate's Colin Burke.
Australia's investment renaissance is also coming at the expense, and reluctance, of first home buyers to take the plunge.
Despite record low interest rates and more affordable homes, the numbers of new buyers entering the market nationally has steadily declined to hit a two-year low.
The plunge is steepest in NSW and Queensland. Midway through 2012 both abandoned first home grant handouts for established properties, a move which prompted a quick and severe reaction - first-timers deserted the market in record numbers.
Only about 800 first home owners took out loans in each state in February, down about 50 per cent on the year before, according to the Bureau of Statistics.
While both states boosted incentives for first-time buyers to purchase a new home, the change - so far - has failed to drive demand.
Victoria, too, is pulling the rug from under new entrants.
In much the same scenario, the government pre-empted next week's state budget figures, announcing it will cut first home owner grants in favour of a $3000 boost to the $7000 already available for first home buyers purchasing a new home.
The drop in activity has stunned home builders. Figures released this week show a 5.5 per cent drop in dwelling approvals, a result labelled "deeply disappointing" by Master Builders Australia's chief economist Peter Jones.
The seasonally adjusted number of private sector houses approved in March rose 0.4 per cent while "other dwellings" including units, townhouses and apartments fell 8.3 per cent.
"Policymakers relying on a recovery in housing to boost the non-mining sectors of the economy would be similarly disappointed," Jones says. "They would have been hoping for a much healthier position at this stage of the cycle."
AMP Capital's Shane Oliver cautions that the shift from first home buyers to investors can be "good and bad" depending on the relative influence each group wields in the market.
"There's always the potential that one group will squeeze another out - that if there's a lot of investor activity it will push prices up and make housing less affordable for new home buyers," he says.
Oliver cites the 2003 boom, where investor demand for established homes drove up prices and created a speculative and unaffordable market.
"If the renewed interest from investors does lead to sharp increases in house prices then there is a risk first home buyers will be squeezed out of the market. But I think it's too early to make that assessment because we haven't yet seen a surge in house prices," he says.
Despite some of the hype around recent house price rises and improving auction clearance rates, prospective home owners are being warned not to anticipate a new boom.
"This recovery in dwelling prices makes sense given how much affordability has improved as interest rates have declined," the RBA's head of financial stability Luci Ellis said recently.
High debt levels and weak credit growth are likely to act as a dampener on the housing market going forward, she maintains.
"Trend housing price growth will be slower in future than in the previous 30 years. Nor would we want to see another boom like the one a decade ago," Ellis says. No doubt many first home buyers back her viewpoint.
But as it seeks to reinvigorate the economy through housing construction as the mining boom wanes, the RBA will be walking a property policy tightrope.
State of the nation
Capital city house prices, March quarter and year to March.
Houses 1.0% 2.7%
Units 1.1% 2.5%
Houses ▼0.2% 2.0%
Units ▼0.5% ▼0.3%
Houses 1.1% 3.8%
Units 1.3% 3.3%
YTD 65.2% 2012 52.6%
Houses 2.2% 3.0%
Units ▼3.9% ▼1.0%
Houses 1.9% 1.6%
Units 1.6% 1.1%
YTD 69% 2012 61%
Houses 2.1% 2.0%
Units 0.4% 1.2%
Houses ▼0.2% 3.7%
Units 2.3% 1.3%
Source: RP Data-Rismark, Australian Property Monitors, Real Estate Institute of Victoria