Investor activity in Australia’s housing market is picking up after a regulator-enforced slowdown in early 2016.
According to the RBA, housing investor credit grew by 0.8% in December, the largest monthly increase seen since June 2015. That followed separate housing finance data from the ABS that revealed lending to investors surged by 4.9% in November, also the largest increase since June 2015.
It was the sixth increase in seven months, and left the value of investor finance up 21.4% from a year earlier.
Coinciding with the recent re-acceleration in investor housing finance, house prices growth has also picked up, particularly in Sydney and Melbourne, previous hot spots for investor activity.
According to data released by CoreLogic today, prices in Sydney and Melbourne jumped by 1% and 0.8% in January, leaving the annual increase in the median dwelling price in both cities at 16% and 11.8%.
As a result of the rapid house price growth, combined with an increase in housing supply, slower population growth and weak rental growth, gross rental yields have tumbled to fresh record lows these cities, according to calculations supplied by CoreLogic.
In Sydney, gross rental yields for houses now sit at just 2.8%, and 3.8% for units. It’s a similar story in Melbourne with houses yielding 2.7% and units 4%.
Not exactly high, even forgiving the low inflation, low interest rate environment right now.
So what gives?
Why, with gross rental yields sitting at record lows, is investor activity in the Sydney and Melbourne property markets increasing again, and at a decent clip?
Tim Lawless, head of research at CoreLogic, reckons there’s a simple answer: investors are speculating that house prices will continue to rise.
“While rental yields plumb new lows, investment in the housing market has been consistently ratcheting higher which implies that investors are speculating on further capital gains in the housing market,” he says.
Speculating on further gains, and who could blame them.
Prices in Sydney have risen by 99.4% since January 2009, and by 85% in Melbourne. With a track record like that, it’s understandable why so many are willing to overlook paltry yields given the increase in capital gains, particularly with the tax benefits that accompany the investment.
However, while the recent house price gains have been stellar, as any good investor knows, past performance is not indicative of future returns.
Just ask those who were buying property in Spain, Ireland, the US during early 2008, or those Chinese investors who were buying stocks in mid-2015.
While not insinuating that the same outcome will occur in Australia’s property market, financial stability risks are building.
Clearly expectations for further capital growth are, broadly, driving the pick-up in investor activity that’s been seen in recent months.
That’s not only an undesirable outcome for policymakers, particularly after years of rapid house price growth, but is also doing little to address housing affordability concerns which are clearly prohibiting many Australians from entering the housing market at present.
Risks are building, as is affordability constraints.
Until policymakers address those issues, they will only continue to grow.