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Will more property investors be exiting the market?

Tim Lawless
Friday, November 30, 2018

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Less investment isn’t entirely due to tighter credit conditions.

Back in mid-2015, investors nationally comprised 55% of new mortgage demand (by value), which was by far a record high for the concentration of investment activity; the previous record high was at the end of the 2000-2003 property boom, when investors comprised 48% of new mortgage demand.

Since 2015, investor activity has been quelled by a broad range of factors, including two rounds of macro-prudential policies, which saw lenders introducing differential pricing on mortgage rates as well as a tougher stance on incomes and expense verification, a broad requirement for more substantial deposits and less appetite for high overall debt-to-loan value ratios from lenders. 

There is no doubt these finance hurdles have been a key factor in reducing investor participation from record highs to a lower (but still well above average) level of 42% as at September this year.

But it’s also fair to say that other factors are likely to be influencing the investor mind set as well. 

Top-of-mind for many investors would be the simple fact that housing values are now falling in the most popular investment markets, Sydney and Melbourne.  At the height of activity, investors comprised 64% of new mortgage demand across New South Wales and 55% across Victoria, and their level of participation remains well above the long-term average in these markets.  Dwelling values are also falling in Perth and Darwin, and growth in Brisbane and Adelaide has slowed to a crawl.  Hobart (+9.7% pa) and Canberra (+4.3% pa) are the stand outs for capital gains, but the pace of growth is slowing in these markets as well, while investor activity across those two states hasn’t hit the levels seen in NSW and Victoria.

Another disincentive is the fact that rental yields are close to record lows, which means the total return (capital gain plus yield) is negative in both Sydney (-4.2% p.a.) and Melbourne (-1.4% p.a.) and relatively low across the remaining large capitals.  Once again, Hobart (+15.2% p.a.) and Canberra (+9.0% p.a.) are showing stand out total returns, thanks to the high rate of capital gains as well as above average rental yields.

Further to the market disincentives, there is also taxation policy that is likely hindering investment activity.  While the debate around negative gearing and a reduction in capital gains tax concession is top-of-mind, and likely to act as an overall negative for investment demand, investors were dealt an earlier blow to their ability to depreciate fixtures and fittings in the 2017/18 federal budget.  These changes were passed by the senate in mid-November last year and prevent investors from depreciating ‘plant and equipment’ items unless they purchased the items directly. 

So, overall, investors are facing mortgage rate premiums, tighter lending requirements, and few prospects for capital gains, low rental yields, a significant reduction in ability to depreciate fixtures and fittings and heightened uncertainty around widely popular taxation policies: negative gearing and capital gain discounts. Although changes to negative gearing would be grandfathered, the reality is that the resale market will be heavily impacted, especially in markets where rental yields are low.  While changes to negative gearing steal most of the limelight in the political debate around taxation policy changes, arguably the reduction in capital gains tax concessions from 50% to 25% could have an even larger impact on investment demand. Overall, we should expect investment activity will continue to moderate and owner occupiers will comprise a substantially larger role in housing demand relative to recent history.

Published: Friday, November 30, 2018

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