Australian Property Investors Softening

What’s an asset people usually feel they must own? I would argue that the answer is property. Property ownership is a wide virtue for many Australians. And around 67% already own their own homes.

Loans for owner-occupiers are now growing at a much faster rate than before. Banks are welcoming the influx of home owners wanting to live in their own homes. Why? Because activity from property investors is drying up.

New home sales have fallen 5.3%. Does this mean Australians will finally be able to afford housing? It’s very possible that first home buyers will start to become more active.  However I have an issue with one word, ‘afford’.

Now you probably hear a lot, and may think yourself, that Australian housing is unaffordable. Yet if you are claiming its unaffordable then what you’re really saying is you want something for nothing.  Of course many people cannot afford to live in the CBD, especially not first home buyers.

And you already know why property close to or in CBDs is expensive. It’s where everyone wants to live. The demand for housing close to CBDs is so high, why would you not think these prices are justified?

And with limited land to work with the only place developers can go now is up. Apartments are shooting up all over the city and inner areas. This has somewhat stagnated and even decreased apartment prices in certain areas. But really, Australian property prices aren’t too high.

The problem is many more people value location over size. As I can imagine, you wouldn’t necessarily like to live in rural Australia. You would much prefer to live within a 30 minute or hours’ drive of a major city.

And of course this is a completely justifiable desire. Living close to a major city connects you to vast amounts of infrastructure, and most likely your place of employment.

These are actually some factors of how property investors go about doing what they do. Just like value investors in the stock market, property investors focus on fundamentals. However, as I said before, loans acquired by property investors are slipping. It is now owner-occupiers that are playing more of a major role in in the $1.3 trillion mortgage market.

And it’s a market which supplies Australian banks with their biggest source of profits.

And what the Reserve Bank of Australia released on Thursday relating to credit is quite telling. The number of outstanding home loans grew at 7.3% in the year to February. Property investors have switched around $32.5 billion worth of loans to owner-occupiers. Of this total, around 1.9 billion occurred in the month of February.

The amount of new credit issued to the private sector also rose slightly.  Seasonally adjusted private sector credit was 0.6% for the month of February. This was a 0.1% increase from last month.

Private sector credit 31Mar16

Source: ABS; APRA; RBA

While this information from the RBA might be confusing, for our purpose the take away is a reduction in property investor loans. So why aren’t investors getting into Australian property like they once were?

As I stated before, residential construction is continuing to slow. And it seems that in particular areas the market is stagnating.

This could be seen as either positive or negative. But what it could mean for a lot of first home buyers is the chance to buy property.

Härje Ronngard,
Junior Analyst, Money Morning

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