RBA warns investors not to rush in as Sydney unit rents start falling anyway
The Reserve Bank of Australia has advised property investors to be “realistic” about price rises in their forecast new era of slower price growth.
The long-run future growth in dwelling prices might be more in line with income growth rather that hot to trot.
The RBA noted increases in investor activity had been evident in the recent pick-up in Sydney housing price growth which had been accompanied by reports of sale prices exceeding price guidance and valuations by wide margins.
It added the increase in housing market activity was not surprising given reductions in interest rates.
"However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth; in contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth."
Another words temper the current rush of buyers into the property market which is creating pockets of price silliness.
It noted the increase in investor activity in New South Wales appeared to have been particularly sharp with investor housing loan approvals accounting for around 40% of the value of loan approvals in NSW, a share last recorded in 2004.
The percentage dominance had coincided with the decline in first home buyer activity which has dropped from well below normal levels given the redirection of government subsidies away from established to new homes.
Just whether the RBA's worldly warnings are duly noted and ignored by the investor market will be worth watching, especially as landlords are facing a reduction in rental returns given the shifting sands of supply and demand.
It could be argued the market is already doing the RBA's work with Residex reporting Sydney unit rents are down 3.85% in the year to August from $520 a week to $500.
Melbourne unit rentals were down 6% to $385 a week. And Canberra's unit rentals fell 12% over the year to $425 a week. Brisbane's rents down 6% to $375 a week. Perth's weekly rent of $430 a week was off by 8% according to Residex.
Nationally unit rents fell over the past year by 5.8% to $400 a week, while house rents were steady at $405 a week.
Ofcourse much goes to the intent of the investors. Australia already has 1.7 million investors, most of whom have just the one investment property, and with some two thirds negative gearers.
Jonathan Mott, the UBS banking analyst, issued an interesting advisory note yesterday titled, Investment Property – Speculators, spivs and tax dodgers?
He went on to say an overly high proportion of investment properties are purchased for expected capital gains (speculation) and tax minimisation (tax dodgers), rather than for rental income as seen in other countries.
Mott suggests the extraordinary leverage of Australian property investors is either the result of a national aversion to paying tax or a greater culture of speculation than other Anglosphere nations.
He says the significant growth in negatively geared investment property over the last 20 years should be of concern.
"While unemployment is low, investment property owners can afford to carry the negative cash flow, especially as they are rewarded with the ability to split the costs with the Government and they anticipate future capital returns."
Mott then posed the question: "But what happens if the unemployment rate rises further?"
