The Australian property investment market bounces back
More property investment means more supply for tenants amid a rental housing crisis
2 min
Investors are returning to the property market after an exodus in early 2023 and a significant decline in investor buying between 2015 and 2020. The lack of investor activity has been seen as a contributor to today’s massive undersupply of rental homes. That five-year decline began after the banks applied higher interest rates to investor loans in a bid to slow investor loan growth, as requested by the prudential regulator.
However, the latest lending data from the Australian Bureau of Statistics shows a 20.4 percent increase in the value of investor loans over the past year, indicating more investors are buying property. This is welcome news for renters across the country, who are finding it exceedingly difficult to secure affordable accommodation amid rapidly rising rents and record-low vacancy rates of about 1 percent.
Last year’s surprisingly strong price growth across most of Australia’s markets has likely inspired more investors to look at property again. Capital growth is typically the primary goal of new investors, with yield seen as simply a way to help pay off the mortgage over time. However, yield becomes more important when interest rates are rising, and a 40 percent increase in rents since the pandemic means many city and regional markets are now delivering healthy yields above 5 percent.
Investors are also increasingly looking beyond their own neighbourhoods for more attractive property investment opportunities, typically in cheaper markets. Research by MCG Quantity Surveyors shows the average distance between landlords’ homes and their investments was 1,502km in the year to November 2023. Prior to the pandemic, that average distance was just 294km.
Western Australia provides an example of this trend, and is one of the hottest markets among out-of-area investors today. This follows a 15.6 percent lift in Perth’s median house price to $691,100 in 2023 – the highest capital gain of any capital city – along with an 8.2 percent increase in regional house values to a median $477,690 – the third highest gain among Australia’s regions, according to CoreLogic figures.
“WA and Perth have caught the eye of Eastern States investors,” said Joe White, president of the Real Estate Institute of Western Australia (REIWA). “They’re drawn by the value our market offers. Despite increases over the past few years, our property prices are much more affordable than the east coast and we’ve had significant rent price growth. This means properties have the potential for very good yields.”
Total returns including capital growth and rent on investment houses reached a staggering 20.8 percent in Perth last year, and 14.5 percent in regional areas, according to CoreLogic data.
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This may be contributing to continually rising weekly rents
2 min
There has been a substantial increase in the number of Australians earning high incomes who are renting their homes instead of owning them, and this may be another element contributing to higher market demand and continually rising rents, according to new research.
The portion of households with an annual income of $140,000 per year (in 2021 dollars), went from 8 percent of the private rental market in 1996 to 24 percent in 2021, according to research by the Australian Housing and Urban Research Institute (AHURI). The AHURI study highlights that longer-term declines in the rate of home ownership in Australia are likely the cause of this trend.
The biggest challenge this creates is the flow-on effect on lower-income households because they may face stronger competition for a limited supply of rental stock, and they also have less capacity to cope with rising rents that look likely to keep going up due to the entrenched undersupply.
The 2024 ANZ CoreLogic Housing Affordability Report notes that weekly rents have been rising strongly since the pandemic and are currently re-accelerating. “Nationally, annual rent growth has lifted from a recent low of 8.1 percent year-on-year in October 2023, to 8.6 percent year-on-year in March 2024,” according to the report. “The re-acceleration was particularly evident in house rents, where annual growth bottomed out at 6.8 percent in the year to September, and rose to 8.4 percent in the year to March 2024.”
Rents are also rising in markets that have experienced recent declines. “In Hobart, rent values saw a downturn of -6 percent between March and October 2023. Since bottoming out in October, rents have now moved 5 percent higher to the end of March, and are just 1 percent off the record highs in March 2023. The Canberra rental market was the only other capital city to see a decline in rents in recent years, where rent values fell -3.8 percent between June 2022 and September 2023. Since then, Canberra rents have risen 3.5 percent, and are 1 percent from the record high.”
The Productivity Commission’s review of the National Housing and Homelessness Agreement points out that high-income earners also have more capacity to relocate to cheaper markets when rents rise, which creates more competition for lower-income households competing for homes in those same areas.
ANZ CoreLogic notes that rents in lower-cost markets have risen the most in recent years, so much so that the portion of earnings that lower-income households have to dedicate to rent has reached a record high 54.3 percent. For middle-income households, it’s 32.2 percent and for high-income households, it’s just 22.9 percent. ‘Housing stress’ has long been defined as requiring more than 30 percent of income to put a roof over your head.
While some high-income households may aspire to own their own homes, rising property values have made that a difficult and long process given the years it takes to save a deposit. ANZ CoreLogic data shows it now takes a median 10.1 years in the capital cities and 9.9 years in regional areas to save a 20 percent deposit to buy a property.
It also takes 48.3 percent of income in the cities and 47.1 percent in the regions to cover mortgage repayments at today’s home loan interest rates, which is far greater than the portion of income required to service rents at a median 30.4 percent in cities and 33.3 percent in the regions.
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