Investors Continue to Focus on Property
By CoreLogic RP Data on 27 Mar 2014
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Why does the latest Australian Bureau of Statistics (ABS) housing finance data report show a slight fall in demand for investment property?
Last week, RP Data senior research analyst Cameron Kusher further explored the latest ABS results, where it was reported that the total value of housing finance commitments for investment purposes was recorded at $10.3 billion in January 2014.
He said that while the value of investment finance commitments had fallen by -3.3 per cent over the month, it is clear that there has been a very strong ramp-up in investment expenditure on housing over the past 18-24 months, with a significant increase in lending to investors.
“…value growth has only been particularly strong within a handful of capital cities.”
“Although this is the case, owner-occupier purchases have also ramped up sharply over the same period,” he said.
While owner-occupier purchases accounted for the greatest proportion of housing finance commitments, Mr Kusher noted a distinct rise in investment lending. In January 2014, investment lending accounted for 38.5 per cent of all lending; a drop from 39.6 per cent in December 2013.
The proportion of activity by investors in the housing market is currently sitting at its highest level since late 2003.
Mr Kusher said that it’s important to remember that late 2003 was the peak in housing market activity and at that time and shortly afterwards, value growth went flat for a number of years.
Source: RP Data, ABS
Why is Investment Activity so Significant in the Current Market?
Mr Kusher reported that the combined capital city housing market recorded a low point in May 2012. Since that time, values have increased by 13.2 per cent.
“Although we’ve seen a broad rise in values, the magnitude of these has varied significantly on a city-by-city basis,” he said.
Since May 2012, home values in Sydney increased by 18.6 per cent, in Melbourne by 14.4 per cent, in Perth by 12.4 per cent and in Darwin by 8.8 per cent.
“The proportion of activity by investors in the housing market is currently sitting at its highest level since late 2003.”
On the other hand, Mr Kusher noted that Adelaide home values are up by 1.0 per cent, Hobart by 2.6 per cent, Canberra by 4.4 per cent higher and Brisbane by 4.9 per cent.
“Based on this it is clear that value growth has only been particularly strong within a handful of capital cities,” Mr Kusher said. “However, the two largest cities, Sydney and Melbourne, have been the primary drivers of capital gains over the current cycle.”
Over the same 22 month period since May 2012, rental growth has significantly underperformed home value growth.
Home Value Growth Outperforming Rental Growth
Across the combined capital cities, rental rates have increased by a total of 4.9 per cent which was significantly less than half the growth in home values.
Darwin (11.7 per cent), Perth (8.4 per cent) and Sydney (5.6 per cent) have recorded the strongest increases in rents; however, only Darwin has recorded stronger levels of total rental growth than value growth.
Every other city has recorded less than 5 per cent growth in rental rates. Across the remaining cities the rental change has been recorded at: Melbourne (3.4 per cent), Brisbane (4.3 per cent), Adelaide (2.5 per cent), and Hobart (0.6 per cent) while Canberra rents are -3.1 per cent lower.
Mr Kusher said, “With home value growth generally outperforming rental growth, it seems that most of the investment activity in the market is focussed on capital gains rather than rental return.
“Rental growth has significantly underperformed home value growth.”
“With investors clearly focussed on capital growth in the market, the potential for failure is when growth slows or falls – what then will happen to the investor segment?
“There’ll be some investors who won’t be overly concerned as they may have negatively gearing their investment by design. However, some will be left with a low yielding asset coupled with potentially low medium term capital gain prospects as the market moves out of the growth phase.
“Potentially a portion of these recent investors will look to exit the residential property asset class if and when value growth slows or falls and move into better performing and more liquid asset classes.”
