Property investment is set to make a comeback. A combination of softening house prices, soaring rental costs, falling interest rates and a bear stockmarket have set the stage for this segment to join first home owners as the drivers of a market recovery.
Darkest hour before the dawn
The last couple of years have not favoured property investment. Shrinking yields and limited capital growth prospects scared many investors away from the market, as did rising interest rates.
In its bid to curb inflation the RBA bumped up the cash rate by 100 basis points between August 2007 and March 2008, lessening the appeal of property compared to other asset classes even further.
It wasn’t always this way. According to QBE LMI’s April 2009 Housing Outlook, investor activity was strong in the last 6 months of 2007, with the total value of loans to investors up 20.8 per cent in year-on-year terms. Then it dropped off considerably and continued to weaken in 2008.
The RBA’s rate hikes combined with rising funding costs left investors with variable rates close to 10 per cent by mid 2008 – bad news for heavily geared borrowers.
These conditions saw investor activity plummet in the six months to June 2008, with activity down by 13.7 per cent compared to the previous year.
It’s a trend that continued into early this year. Investor finance dropped 32 per cent (seasonally adjusted) in January according to the ABS, compared to January 2008. Just $4.891 billion worth of investment loans were written compared to $7.237 billion at the start of 2008.
But the property cycle has turned, and with the gap between rental yields and interest rates closing, 2009 could be the start of the investor market recovery.
Louis Christopher of property analyst and research group Adviser Edge says property is undoubtedly a very attractive investment option again.
“The property market is now offering the highest rental yields since the 1990s,” he says.
A whopping 4 per cent reduction in the cash rate in the last eight months has helped ripen conditions for investment and according to Mr Christopher, positive gearing “is a realistic possibility for many properties at the moment”.
Supply and demand
Rising rents are one factor driving renewed investor interest. A severe under-supply of housing has pushed rental values up sharply over the last 12 to 18 months and the signs are that they will only continue to climb.
The National Housing Supply Council released its State of Supply Report in March. It estimates that Australia suffered an under-supply of 85,000 dwellings in 2008 and expects this figure to rise to 203,000 by 2013 if construction activity does not improve markedly. ABS data for January showed dwelling approvals were down 31.7 per cent on January 2008 levels.
The most recent data from the Real Estate Institute of Australia (REIA) reveals that vacancy rates remain tight across the nation, with most capital cities’ sitting below 2 per cent. Adelaide and Melbourne are the tightest markets at 1.2 per cent, with Sydney close behind at 1.4 per cent.
With interest rates likely to drop a further 50 basis points, Mr Christopher says the outlook for investors can only get better.
“Positive cash flow benefits could soon be a reality for many investors, based on the average Australian residential property price with a LVR of 90 per cent,” he says.