Investors Bet on Capital Gains

Tuesday, January 27th, 2015
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Australian real estate investors are becoming increasingly vulnerable to interest rate hikes or property market slumps as rental levels continue to lag gains in dwelling prices. 

Rental levels in Australia’s major urban centres logged only tepid growth last year, as properties for lease continue to throng the market and investment demand flourishes.

The latest data from CoreLogic RPData’s quarterly Rental Review indicates that rental levels in the capital cities of Australia have just posted their poorest performance since the middle of last decade, with growth of only 1.8 per cent in 2014.

Unit rents significantly outpaced house rents in capital cities over the past year, rising 2.5 per cent and 1.2 per cent respectively. Dwelling prices, by comparison, rose a hefty 7.9 per cent over the same period.

ABS data indicates that rents in capital cities have remained lacklustre for the past five years, with average growth of only 3.1 per cent per annum for houses and 3.2 per cent for units.

Home prices have significantly outpaced these tepid gain in rent, however, with average annual gains of five per cent over the same period for a rise of around 25 per cent in total.

The disparity in growth between rents and prices means many real estate investors are losing money on their rental properties, betting instead on capital gains as housing prices in Australia’s burgeoning property market approach record highs.

Investors are still leaping on the property band wagon in record numbers by route of borrowing, however, pushing debt levels to dizzying highs. According to the latest data from the Australia Bureau of Statistics, investors comprised a record 51 per cent of new mortgages in October, for a year-on-year gain of 46 per cent.

Data from the Reserve Bank of Australia further indicates that debt reached a high of 153 per cent of annual household disposable income in September last year.

The prevailing situation in the property market has thus made investors highly susceptible to any interest rate hikes or dips in property values.

According to CoreLogic research analyst Cameron Kusher, present circumstances are unlikely to change any time soon, with rents expected to continue lagging property prices over the upcoming year.

“Given the recent high number of dwelling approvals and commencements coupled with the high level of purchase activity from investors, we would anticipate the rate of rental growth will remain soft throughout 2015,” Kusher said in the report.

The latest data from the Bureau of Statistics indicated that a record number of building approvals were issued by local governments in November last year, particularly for apartments.

According to Kusher, much of the new housing supply that is coming online is directed specifically at demand from real estate investors, and which will further increase the amount of rental stock on the market and place further pressure on rent levels.

Kusher advises caution on the part of investors preoccupied with capital gains at the expense of rental revenues, particularly given that home values have posted declines in three years out of the past ten.

“Investors do need to pay more attention to the rental return than they are at the moment,” said Kusher.

Not all industry analysts are so dour in their assessment, however. Data from Domain Group indicates that vacancy rates for both houses and units have sunk to low levels in the nation’s capital cities, which should bolster rents in the upcoming year.

According Domain Group’s figures, the vacancy rate for Australia’s capital cities was just 2.4 per cent in December. Houses logged a vacancy rate of two per cent, while for units the figure was three per cent.

“Upward pressure on rents is set to continue through 2015, particularly in the robust Sydney market where underlying demand continues to outstrip supply,” said Domain senior economist Andrew Wilson.

According to Wilson, low vacancy rates in tandem with gains in rents should assuage any concerns about excess speculation amongst investors chasing capital gains, and reduce the likelihood of action on the part of regulators.

“With residential investment markets remaining reasonably balanced and prices growth set to continue to moderate in 2015, the prospect of the introduction market constraining macro-prudential controls on investment lending is clearly diminishing,” said Wilson.

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