The Tide Turns for Investors - July 09

[Mark Steffens]

17th July 2009 - Extract from MyRPData Property Pulse eNews

Since the onset of the Global Financial Crisis investment in Australia’s residential markets has seen a lacklustre performance where investors have been somewhat thin on the ground - however investors are starting to venture back into property on the back of strong rental yields and an overall improvement in confidence.

One of the most useful ways to understand the ratio of owner occupiers to investors in the residential market is to analyse housing finance commitments. This data is published by the Australian Bureau of Statistics and acts as a very good barometer of future levels of market activity.

Both owner occupier and investor finance commitments started to trend downwards at the beginning of 2008 as interest rates reached a peak and the reality of the global financial crisis crystallised.
Home buyers were much quicker to return to the market, responding to low interest rates, the boost to the First Home Buyers Grant and strong buying conditions. Since September last year the value of owner occupier housing loans has increased by a whopping 42 percent. Over the same period the value of investment loans increased by a comparatively small 6.6 percent.

The tide turned for investors much later, with the value of investment loans continuing to decline up until the end of February ’09; the last time the level of property investment was this low was back in 2002. Since this time investor finance commitments have been moving upwards, increasing by 18 percent to the end of May.
The return of investors to the market was delayed due to several reasons. Investor confidence had been eroded significantly; not just by the state of the global economy but also by the shock of seeing share portfolio’s halve in value and the prophets of doom and gloom suggesting property values were likely to do the same. With Australian property values proving to be very resilient, and, in fact showing modest increases since the start of the new year, investor confidence is likely to have improved markedly.

Investors are also likely to be waiting for first home buyer activity to start winding back before moving back into the market en masse. There is a considerable overlap between investor and first home buyer buying preferences, with both segments often targeting similar properties. Investors are likely to shy away from such competition. As the deadline approaches for the wind back of the First Home Buyers Boost (the boost will be halved on October 1st and removed entirely on January 1st) investor numbers are likely to gather further momentum.

In terms of the peak investment timing, investors who are prepared to buy now are likely to be buying into the market at a very attractive time. Rental rates have increased by 34 percent over the last three years and now appear to be peaking. Securing a rental lease at peak rental rates has obvious benefits for an investor with regards to cash flow.

The rise in rental rates, together with overall flat property prices over the last year has resulted in solid gross rental yield improvements. Nationally, houses are now returning a gross rental yield of 4.5 percent and units are returning 5.3 percent. Darwin is providing the best gross yields at 6.4 percent and 6.1 percent for houses and units respectively.

Additionally, for those investors who are targeting properties priced over $500,000, competition in the market is comparatively light. Some of the most popular investment regions are likely to be found closer to the city, within the inner and middle rings of the capital cities where first home buyers are generally priced out of the market.