Property rush: investors lead market revival

Investors are driving the rebound in the housing market. But this has come at the expense, and reluctance, of first home buyers to take the plunge, write Simon Johanson and Chris Vedelago.

Think back to 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, the 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 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.

Bureau of Statistics figures show loans to investors soared 16 per cent in the past year. 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 worryingly, 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), RP Data figures show.

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 bureau's February figures.

The upturn also reflects a shift in attitude towards bricks and mortar.

Australia is 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 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," Eslake says.

Those one-in-seven taxpayers have sensed an opportunity that other mothers, fathers 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," MacroBusiness economist Leith van Onselen says.

The economic gyrations following the global financial crisis have narrowed their 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 - roll over or run.

These falling returns on cash deposits are accelerating a push into property by self-managed superannuation funds (SMSFs), observers say. The popularity of so-called "smurfs" is rocketing. About 478,000 are operating in Australia and 23,000 new funds are created each year, the Tax Office says. And they are starting to wield enormous financial clout, accounting for about $439 billion in assets, including shares, cash, residential and commercial property.

Eager SMSFs, along with businesses and other private investment vehicles, see bricks and mortar as a super solution and they spent $904 million on investment housing in February alone, up 76 per cent on the same time last year.

And the proportion of funds held in short-term deposits and property has increased as SMSFs delay their next investment decisions.

One fund manager, Multiport, oversees 2600 SMSFs with combined assets of $2.2 billion.

If Multiport's figures are extrapolated across the industry, they would equate to nearly $48 billion in funds, technical services director Philip La Greca says. "That's a lot of cash that's going to be looking for a home. Property seems to be the comfortable spot people are looking for."

The proportion of SMSFs buying property as a direct asset has shot up - 88 per cent of real estate in Multiport's funds is held directly as opposed to trusts or other vehicles.

"We put that down to the gearing," La Greca says.

But there are risks for SMSFs seeking to enter the property market, observers caution. The rules are complex and funds can be difficult and costly to unwind if put together incorrectly.

The breakneck pace of Australia's population growth is also playing a role. Melbourne's population rose by 77,242 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 - an anathema for investors.

Houses have not recorded rental growth for more than two years. And while apartments have fared slightly better, despite forecasts of a glut, 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, where 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, Propertybuyer.com.au managing director Rich Harvey says.

'There's a pattern of re-emerging confidence in both the investor and home buyer market," he says. In suburbs such as Blacktown and Liverpool, buyers are adding a granny flat at the rear and achieving yields of 8 per cent to 9 per cent on a $350,000 investment.

"Anything under $600,000 in the unit market is also very competitive' so choosing suburbs that provide long-term capital growth is important, Harvey says.

"You've got to buy in areas where there is something driving that market, where there is likely to be a strong upswing," he says, nominating places such as Frenchs Forest with its plans for a $2 billion hospital and the suburbs being gentrified near the airport.

"It certainly shows where the energy is in the market right now," Australian Property Monitors chief economist Dr Andrew Wilson says. "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 have risen 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 off-the-plan apartments, says rising rents are creating a competitive tension between investors and owner occupiers in a market that has 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.

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 - are in for 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," RP Data's Tim Lawless says.

"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 several mining towns, 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".

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."

Real estate agents in mining towns 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 rose 20 per cent and rents more than doubled. A new furnished two-bedroom apartment that once fetched $850 a week now rents for $550.

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," Elders Real Estate's Colin Burke says.

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 a two-year low.

The plunge is steepest in NSW and Queensland. Midway through last year, both abandoned first home grants for established properties, a move that prompting 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 previous year, the Bureau of Statistics says.

While both states boosted incentives for first-time buyers to purchase new homes, the change has failed to drive demand so far.

Victoria, too, is pulling the rug from under new entrants.

In much the same situation, its government pre-empted next week's state budget figures, announcing it would 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 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 Dr 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 prices higher and created a speculative and unaffordable market.

"If the renewed interest from investors does lead to sharp increase 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, has said.

High debt levels and weak credit growth were likely to act as a dampener on the housing market going forward, she says.

"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 will be backing 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.