Property investors hogging first-home market
The rise in house prices, especially at the more affordable end of the market, is being driven heavily by people buying homes they have no intention of living in.
The share of home loans going to first-home buyers has fallen to near an eight-year low. Investors' share of new mortgages being written, on the other hand, is above its long-term average at more than 36 per cent. In NSW, investors have a whopping 40 per cent share, the highest level in almost a decade.
If you're one of those people who reckons property is indeed an attractive investment at the moment, you may ask "So what?"
When fixed-interest rates are below 4 per cent, and rental yields around this level, it's hardly surprising more property investors are snapping up homes.
But some market analysts say the big role of investors is also a vulnerability.
So what's more risky about a property boom based on investors?
An important factor is that many investment properties are actually loss-making, because they are negatively geared. This is where the cost of the (tax deductible) home-loan interest repayments are greater than income from rent.
It's a wildly popular strategy that relies on capital gains in the long run and can be effective when prices are rising quickly and the economy is in good health.
What appears to make sense for individuals, however, isn't necessarily healthy for the system as a whole.
UBS analysts recently pointed out that if there are more and more highly-leveraged property buyers pushing up prices, that necessarily comes with risks.
Unemployment is the biggest one. UBS said 72 per cent of negatively geared landlords have a taxable income of less than $80,000 - so they are not super wealthy.
If unemployment were to rise sharply, there are doubts over whether the nation's many highly leveraged landlords would be able to keep running negative gearing strategies, and may be forced to sell.
And if many of these landlords had to sell at the same time, it could hit prices hard.
Interest rates are another risk. Many investors are locking in fixed-rate loans at interest rates below 4 per cent today, but these most commonly have a term of three years.
When these loans need to be refinanced, it's likely to be at a higher interest rate.
Getting hammered
Frequently Asked Questions about this Article…
Investors are buying a large share of homes because low fixed interest rates (below 4%) combined with rental yields near that level make property an attractive investment. The article notes that investors now account for more than 36% of new mortgages, and in NSW their share is about 40%, leaving fewer opportunities for first-home buyers.
The share of home loans going to first-home buyers has fallen to near an eight-year low, according to the article. That decline is largely attributed to more investors snapping up affordable homes and outbidding first-home buyers at auctions.
Negative gearing is when the tax-deductible interest on a rental property loan exceeds the rental income, meaning the property runs at a loss that investors offset for tax benefits. Many landlords accept short-term losses hoping for capital gains over the long run if prices continue to rise.
The article highlights that a market reliant on highly leveraged, negatively geared investors is vulnerable if conditions change. If unemployment rises or interest rates increase, many less-wealthy landlords (UBS says 72% of negatively geared landlords have taxable income under $80,000) could be forced to sell, which could put downward pressure on prices.
Many investors are on fixed-rate loans under 4% that typically last about three years. When those loans come up for refinance, investors are likely to face higher interest rates, increasing carrying costs and potentially making negative gearing strategies harder to sustain.
Analysts in the article point out that price growth powered by more and more highly leveraged buyers increases systemic risk. If many investors are forced to sell at the same time because of job losses or higher rates, it could trigger sharper price declines than in markets driven by owner-occupiers.
A high investor share — around 40% in NSW as the article states — means stronger competition for homes, particularly at the affordable end of the market. That makes it harder for first-home buyers to secure properties and can push prices up in those segments.
Think beyond current rental yields and low fixed rates: assess your ability to cover higher repayments if interest rates rise, how the property performs if rents fall, and whether you’re comfortable with a negative gearing strategy that relies on future capital gains. The article warns that many investors are leveraged and not very wealthy, so economic shocks like rising unemployment could force sales and hit prices.
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