In the Financial Stability Review released in March, the Reserve Bank acknowledged that increased investor demand for housing causes speculative investment.
This has occurred in the Sydney housing and unit market, which is less a place for finding somewhere to live and more of a trading floor to make money.
This is further supported by Australian Bureau of Statistics data, which show that home loans taken out by first home buyers have steadily decreased from 18.8 per cent in 2012 to 14.9 per cent in 2015.
The effect of more investors coming into the market is higher volatility. Volatility is a measure of how extreme or dispersed your returns on something will be. The higher the volatility, the higher your returns will be. The flip side of this is that your losses will also be larger.
To get a sense of how volatility has grown over the past two decades, we can consider the range of capital growth values over time for Sydney metropolitan houses. For example, in the period 1990 to 1995, the Sydney market saw losses of 1 per cent per annum and highs of 10 per cent per annum. The range of returns in this period is 11 percentage points. Between 1995 and 2000, this range widened to 15 percentage points, and between 2000 and 2005 it widened further to 29 percentage points. Over the past five years the range of returns has remained 23 percentage points, with growth ranging between minus 3 per cent and 20 per cent. These sustained, higher ranges point to larger volatility in housing returns.
The growth rate movements fluctuated significantly, with greater highs and lows from the year 2001. Sydney experienced a growth high of 25 per cent in 2001 followed by a huge correction, to the point where growth actually contracted by 3 per cent in 2004. This contraction then continued for the following three years.
In the last months of 2014 it looked as if the Sydney market was peaking and would begin to correct. The Reserve Bank then announced a cash rate cut in February.
Demand-related policies, such as a government crackdown on foreign investment and high unaffordability in the Sydney market, may see it finally settle down. The question of how much a correction the market experiences, depends largely on supply.
Approvals for construction in Australia have hit a record. This could be driven by speculation rather than demand for places to live. We need to ask how many dwellings are being built, versus how many people are actually going to live in these dwellings. Having a house or unit as an investment property is not much good if there are no tenants to live in it or nobody to buy it from you.
Although there is no precise measurement of demand and supply in the housing market, we can at least look at the number of people entering the country versus the number of residential dwellings on which construction has begun.
Over the past 10 years ABS data shows that dwelling commencements rise after a spike in population growth, which leads to a market correction and falling prices or slowed growth in prices.
In June 2014, gross national population increases fell sharply from 111,600 in March 2014 to 68,400. Meanwhile, housing commencements rose to their highest levels for the past 20 years. This indicates we could be entering a correction period where more houses and units are being built than will be needed by the time of completion.
Investors should remember that current high prices are not a reason to rush out and invest in new properties. Particularly at this moment, just coming off the peak of the current growth cycle, we need to remember there is a time lag between current price signals and dwelling supply in the process of construction. In 2015, Onthehouse.com.au expects Sydney’s unit market to grow very modestly. Record high levels of unit construction approvals could reduce this growth figure even further.
If you are looking for a more in-depth analysis of our market analysis, you can find this in the Investor Centre at Onthehouse.com.au.