Investors continue to focus on property

Investors continue to focus on property
Investors continue to focus on property

In the latest ABS results it was reported that the total value of housing finance commitments for investment purposes was recorded at $10.3 billion in January 2014.

While the value of investment finance commitments had fallen by -3.3% 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. Although this is the case, owner occupier purchases have also ramped up sharply over the same period.

The proportion of activity by investors in the housing market currently is sitting at its highest levels since late 2003.

While owner occupier purchases accounted for the greatest proportion of housing finance commitments, there was a distinct rise in investment lending where in January 2014, investment lending accounted for 38.5% of all lending; a drop from 39.6% in December 2013. The proportion of activity by investors in the housing market currently is sitting at its highest levels since late 2003. 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.

Investors continue to focus on property

Why is investment activity so significant in the current market?

The combined capital city housing market recorded a low point in May 2012. Since that time, values have increased by 13.2%.

Although we’ve seen a broad rise in values, the magnitude of these has varied significantly on a city-by-city basis.

Investors continue to focus on property

Since May 2012, home values in Sydney increased by 18.6%, in Melbourne by 14.4%, in Perth by 12.4% and in Darwin by 8.8%. On the other hand, Adelaide home values are up by 1.0%, Hobart by 2.6%, Canberra by 4.4% higher and Brisbane by 4.9%. Based on this it is clear that value growth has only been particularly strong within a handful of capital cities, albeit 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. Across the combined capital cities, rental rates have increased by a total of 4.9% which was significantly less than half the growth in home values. Darwin (11.7%), Perth (8.4%) and Sydney (5.6%) 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% growth in rental rates. Across the remaining cities the rental change has been recorded at: Melbourne (3.4%), Brisbane (4.3%), Adelaide (2.5%), and Hobart (0.6%) while Canberra rents are -3.1% lower.

Investors continue to focus on property

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.

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?

Investors continue to focus on property

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.

Note: Housing finance data is released by the Australian Bureau of Statistics (ABS) each month and provides valuable insight into residential lending. A key trend recently has been the heightened level of activity by investors. It is important to remember that the data is based on finance commitments by Australian Authorised Deposit-taking Institutions (ADIs). Finance sourced from overseas is not included in the data.

Cameron Kusher

Cameron Kusher

Cameron Kusher is senior research analyst at CoreLogic RP Data.

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