Do Investors Be Barking Up the Wrong Tree??
The primary driver of the housing market returns has been the owner occupiers with 76% of all new home loans over twelve months up to March 2021 as compared with the decade average of 65% only. As investors become more active in market, but the mix of housing activity is starting to change as well. In the last six months, the percentage of investor loans increase by 48.1% as compared with the smaller percentage of owner occupier loans of 29.7% only. The March quarter alone saw the value of lending for housing investment go up by 28.7% while the value of new owner occupier home loans only went up by 12.4%. On a yearly basis, “the growth in the value of owner occupier lending (+55.6%) is now roughly on par with the lift in investor loans (54.3%) as investors play catch-up” (CoreLogic, 2021).
Despite the growth in investor lending, investment loans have only 25.9% of the value of new mortgage commitments in the month of March, up from a recent record low of just 23.1% in January this year. Historically, the share of investor activity peaked at 45.9%, shortly after macroprudential measures were announced in December 2014. The measures in Year 2014 placed a 10% speed threshold on investment credit growth. While the share of investor lending dramatic a temporary bounce back in 2016, investor activity turned due to a second round of credit tightening in 2017, which focused on reducing interest only lending. Together with a more cautious lending environment during and after the Royal Commission, the share of investors in the market trended consistently lesser until February this year.
Investor activity remains lower than the average across every state and territory, ranging from just 13.3% of mortgage claims in the Northern Territory to 31.5% of claims across the New South Wales.
“The loan commitments data shows investor demand remains concentrated in New South Wales with most of this activity likely to be concentrated within the Sydney region. New South Wales has historically attracted the largest share of investors, with this group of buyers averaging 41.4% of mortgage demand over the past ten years and in March 2021, New South Wales was the only state where investors comprised more than 30% of mortgage demand (CoreLogic, 2021).”
The intensity of investors in New South Wales may seem a little counter intuitive. Sydney is the most high-priced capital city by some margin, implying the financial commitment is more significant than other regions. It also has the lowest rental returns, signalling some disparity between housing values and rental rates. Where Sydney stands out is capital gains; “Sydney has the highest average annual rate of capital gains over the past decade with house values averaging a 6.6% rise each year and unit values averaging 4.5% per annum.” With most investors focused on capital gain rather than rental return, this track record of growth might help to explain the popularity of Sydney amongst investors (CoreLogic, 2021).
Over the past year, Darwin records the most significant rate of capital gain, with house values up to 18.2%. Regional Tasmania (17.8%) and Regional New South Wales (16.3%) come in a close second and third. Across the unit market, the swiftest rise in values has been in Regional Victoria (13.6%) and Hobart (11.6%).
For investors more focused on cashflow opportunities, the higher yielding markets may be more attractive. “The highest capital city gross rental yields can be found in Darwin (5.6%), Hobart (4.4%) and Perth (4.3%) for houses, while gross yields for units are highest in Darwin (7.2%), Canberra (5.5%) and Perth (5.4%).” Returns are generally greater across regional markets, with Regional Northern Territory (6.3%) and Regional Western Australia (5.9%) recording the highest gross yields for houses. Regional WA also stands out with the highest gross yield for units at 8.0%.
The total return, which offers a measure of the annual capital gain plus annualised gross rental return, highlights the areas that have provided the best overall investment returns. In the past twelve months, regional Tasmania (24.5%) and Darwin (24.4%) have provided the highest total returns for houses amongst the broad regions of Australia. For units, the strongest overall returns over the past year have been in Regional Victoria (19.3%) and Regional Queensland (16.9%).
Of course, past performance is not a guarantee of future performance. In fact, the best investment options may be those markets that have underperformed over previous cycles, providing a more affordable environment and generally higher rental yields.
Demographic factors, which have changed significantly over the past twelve months, will also play a role. Overseas migration is set to remain low for at least the next year, implying regions with strong interstate and internal migration rates will have a higher level of housing demand. “South-East Queensland, Perth and regional areas of Victoria and New South Wales are all showing a positive demographic trend (CoreLogic, 2021).”
Economic conditions are also important. Regions with a diverse economic base are likely to show less risk relative to areas with shallow economies. Trends in jobs growth, employment rates and capital investment such as significant infrastructure spending are also critical for picking areas ripe for investment.
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