Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

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Catherine Cashmore

17 February 2013

Why investor activity is causing our property markets to stagnate

Investor activity has dominated the Australian property market over the last 12 months, which is no surprise; banks are “bidding” for buyers in a highly competitive market, reducing interest rates principally on fixed-term loans outside of the RBA’s cash rate cycle, and if the right property is sourced, current rental yields are also offering attractive returns.

However, first-home buyers have seen their savings eroded, and as the latest ABS finance data outlines, intermittent first-home buyer “cash injections” or the oft-quoted myth that rising yields are pushing greater numbers into the market are having scant effect. Saving a deposit and sourcing a suitably affordable property is no easy task.

It’s not being sensationalist to emphasise that despite all our statements regarding improved housing ‘affordability,’ and half-hearted attempts from both state and federal governments to inflate the market with incentives that fail to offer long-term solutions, the results for initial buyers are overwhelmingly clear and will consequently bear an effect on the future of both our real estate market and economy as a whole.

The latest figures from the ABS show the number of first-home buyer loans in December 2012 fell to 14.9%. It’s the fourth consecutive month that this segment of the market has been in decline.  Further information from RP Data’s latest media release indicates housing finance activity by first time buyers is 17% below the average figures recorded over the previous 11 years leading to 2012.

A further drop in variable rates currently being offered by a proportion of lenders may inspire a bit of latent activity – however they are all short-term fixes, and you have to wonder what effect will result when rates eventually rise – especially if wage growth doesn’t match pace.

According the RP Data’s calculation of annual price changes (which is based on six months of statistics) – house prices are already rising “faster than wages and disposable household income growth”. Any help first-home buyers get on the borrowing side they’ll inevitably lose on the other.

We’re losing a valuable demographic of property buyer, which will have a flow-on effect across the property chain as a whole. As the changes push through the generation gap, increasing numbers will retire while still factoring as short-term renters.

In lieu of first-home buyer participation, the predominant activity in the inner-city affordable sector of the apartment market is being fed by investors.

Certainly most off-the-plan and new unit developments are sidelined for this demographic (usually via offshore funding); however, investors also dominate the established apartment market, which would otherwise be favoured by first-home.

The percentage of investor-owned apartments in both Darwin and Brisbane falls close to 70% – and in the other capitals, it comes in between 60 and 70%.

As we’re all aware, property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading (and then downsizing) a ready market to sell into in order to make the move.

However, when investors predominantly negatively gear into the asset class most favoured by first-home buyers – which results in inflated property values – and the state government fails to come to the party with feasible affordable alternatives, our property wheel of upgrading and downsizing becomes somewhat stagnated.

Investors tend to hold property for extended periods of time in order to build equity – many choose to invest as part of their self-managed super funds and subsequently do not sell until retirement. Therefore the ready supply which would usually come from initial home buyers selling and upgrading inevitably starts to slow.

It’s clear from the 2011 census data that greater numbers of first-home buyers are being forced onto the rental ladder and subsequently getting stuck in the yoyo of rising yields and a lack of affordable inner-city options until they either meet someone with whom to combine wages or gain access to the “mum and dad” equity pot.

Proportionally we’re growing older as a nation – census data tells us the number of 20- to 44-year-olds has expanded on average by 4.6% per year in the five-year period leading up to the last census – however by 2020 it’s expected to slow to 1.2% per annum (a trend clearly demonstrated by the United Nations World Population pyramid, which extrapolates the data out to 2050).

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