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An ongoing theme in the recent increase in housing market activity has been that it has largely been driven by investors and upgraders rather than the first home buyers. If you recall, it was first home buyers that led the market recovery back in 2009.
The surge in first home buyer activity saw this cohort of the market account for as much as 31.4% of the total number of owner occupier finance commitments back in May 2009; in May 2013 they accounted for just 14.6% of all owner occupier commitments and in terms of the number of commitments there were more than 10,000 fewer first home buyer commitments in May 2013 than there were in May 2009. The first home buyer market is much thinner this time round which may be due to a number of factors however, it is clear that the fact that there is no boost to the first home owner’s grant is partially responsible. So too is the fact that in New South Wales and Queensland the first home owner’s grant is only available for new homes with Victoria recently following suit (as at July 1 this year). This has seen the proportion of first home buyers sink to just 7.3% of all owner occupier finance commitments in New South Wales and 9.8% in Queensland, both at pretty much record low levels. Although you would think incentives for first home buyers to purchase new product would be a positive, new stock is typically more expensive than pre-existing stock and therefore it may actually act as a disincentive for these first time buyers to move into the market.
So with first home buyers making up just a small overall proportion of the housing market, it is the upgraders and investors which are really driving the overall market activity. Data relating to investment activity in the housing market is only presented in terms of the total value rather than the number of loans, nevertheless the trend is quite clear.
In May 2013, $8.4 billion worth of housing finance for investment purposes was committed to. The $8.4 billion was the highest level of finance for investment purposes since January 2008 ($8.3 billion). As the below chart highlights, investment finance commitments have been ramping up sharply over the past 12 months, increasing by 23.7% on a year-on-year basis and indicating a surge in investment activity in the housing market.
As already highlighted, first home buyer finance commitments are at extremely low levels however, the total value of owner occupier new loan commitments (which exclude refinances) have increased by 18.5% year-on-year to May 2013. This data highlights that upgraders are also playing a significant role in the market currently albeit it is being outstripped by the rise in investment activity.
So why are upgraders and investors so active in the current market?
Clearly the low mortgage rate environment is proving to be an attractive incentive to investors and upgraders but one would think that it would also be attractive to first time buyers however, this has not been the case perhaps due to the reasons already highlighted as well as the fact that much of the first home buyer demand was brought forward due to the availability of previous grants and stamp duty concessions.
From an investment perspective it is probably the hunt for yield, or the combination of yield and capital growth prospects, which is driving the increase in investor activity. With official interest rates low and yields on most forms of investment quite low, I believe investors are increasingly seeking out higher yielding properties that will hopefully show medium to long term capital growth prospects. Although housing is not a liquid asset, investors can get in now and lock in a yield in the hope that rents and values continue to trend higher over the coming years which would subsequently boost their return. Whether this is proves to be a good investment strategy will of course be revealed over the coming years.
The current spread between official interest rates and capital city gross rental yields is 152 basis points. This is close to the largest spread since 1999. Units tend to be much more attractive to investors in the housing market and the current spread in 215 basis points which is the largest spread since late 1997. Of course these figures are just looking at the spread between the gross yield and don’t factor in the moderate growth in values which has been recorded at 4.0% for houses and 2.4% for units across the combined capital cities over the past year. Given this, I don’t think it is any surprise that investor activity has been surging back to the housing market.
On the upgrader side of the equation, the likely reason this segment of the market are so active is due to a few main factors. Firstly mortgage rates are extremely low currently and the likelihood of any short term increases to mortgage rates seems limited so upgraders are taking advantage of these conditions. In fact, if you were to fix in your mortgage for three years you could find a rate beginning with a 4. Secondly, growth in home values has been quite modest over recent years, with combined capital city home values increasing by just 12.8% over the past five years. Of course there are varying performances across individual cities but values have generally risen at a modest pace recently. Finally, households have been saving around 10% of their income for the past five years reversing the 30 year trend of declining rates of savings. The additional savings means that if you were to upgrade and use those savings, the size of your borrowings may be similar or perhaps even lower than the initial loan on the current home.
Overall, despite the fact that upgraders and investors have been so active in the market growth in home values has been quite modest to date. Sales activity has lifted from an extremely low base however, the evidence suggests there isn’t a level of speculation in the market to drive values significantly higher. This is probably due to the fact that the more emotive first time buyers are playing a relatively small overall part in the market currently whereas the more experienced upgrader and investor market is driving current market activity.
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