14 Apr Why investors are re-entering the market
Author : Karen Maley of AFR
The country’s house price party is likely to heat up even further, with bankers reporting that property investors – who have long sat on the side-lines – are finally beginning to join in the festivities.
Until now, the boom in house prices has been a very patchy affair. There’s been a huge run-up in the prices of suburban houses – the preferred abode of owner-occupiers, who have taken advantage of ultra-low borrowing costs to upgrade their dwellings.
House price growth has been stronger for detached houses than for units in the present boom.
But the prices for inner city apartments, which tend to be favoured by investors, have languished.
And this has created a very unusual, two-speed house price boom. As one senior banker noted: “The market is hot in some places, and cold in others. In particular, inner city apartments aren’t going well at all.”
The Reserve Bank of Australia also drew attention to this two-speed house price boom in its April financial stability review.
The review pointed to the “important compositional differences” in the latest housing rebound.
Price growth, it noted, has been “stronger for detached houses than for units”.
And it added that “rental conditions have also been weak, particularly in Melbourne and in the inner and middle suburbs of Sydney where vacancy rates have increased sharply and rents for units have fallen”.
Certainly, the review gave property investors – who tend to favour inner-city apartments – little cause for optimism.
“The closure of Australia’s international borders is expected to cause population growth in 2021 to be around 1.25 percentage points lower than previously expected and has reduced demand for inner city rental housing by international students,” it said.
“A shift in preferences towards detached houses has also been weighing on demand for inner city apartments.”
Still, the review did offer property investors some solace.
“Near-term risks of oversupply – and therefore sharp price declines – are mitigated by the considerably smaller volume of higher-density inner city apartments due for completion in 2021 relative to previous years.”
But property investors are clearly a much more optimistic bunch than central bankers.
And they see a much greater prospect of property price appreciation than one might expect from reading the Reserve Bank’s comments.
What’s more, they’re acting on this optimism. Senior bankers report property investors have shown a renewed appetite for borrowing in the past month, after shunning the market for at least a year.
Lending for investor housing rose by a modest 0.2 per cent in the 12 months to February 2021. But this represents a significant rebound from the depths of the pandemic, when lending for investment housing contracted by 0.6 per cent in the 12 months to last July.
Bankers said the pick-up in investor demand for loans had only become evident in the past month or so and was unlikely to be reflected in official figures as yet.
But they noted they were detecting a discernable shift in investor sentiment towards the property market.
One factor buoying investor confidence is rental yields have stabilised, which means that investors no longer need to worry that they could be sitting on a hefty capital loss from their investment property.
Investors also appear to be heartened by the overall strength of the housing market, and by the consensus that property prices will continue to climb as the economic recovery continues to pick up pace, while borrowing costs remain at historic lows.
But bankers said that property investors also appear to be punting that apartment prices could rise sharply when international borders reopen and immigration resumes, particularly given the sharp decline in the construction of new apartments.
According to figures from the Australian Bureau of Statistics, ultra-low interest rates are doing their job and triggering a sharp rebound in building approvals.
New dwelling approvals bounced back strongly in February, with approvals for private sector houses hitting a new record high.
But apartment approvals remained subdued compared with the levels of the past seven years. Approvals for private sector dwellings excluding houses were 28.7 per cent lower in February than a year earlier.
And this is good news for investors because it appears that one of the consequences of the pandemic is that there is not much in the way of new medium- and high-density residential developments in the pipeline.
This raises the prospect that when international borders are reopened, when foreign students return and immigration resumes, the country could face a housing shortfall.
Property investors know that because higher density developments take so long to plan and develop, it is impossible to quickly boost supply even if demand were to rise sharply.
That means that when international borders are finally reopened, inner city apartments are likely to benefit as both rental yields, and prices, rise.
Credits to Karen Maley and AFR for the article