Property investors hogging first-home market
Ask any dejected first-home buyer who's just been outbid at an auction who it was who beat them, and you're likely to get a consistent response. Property investors.
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.