On July 5, CoreLogic published an article headlined “Residential rents hit record highs as national vacancy rates plummet”.1
This should give you some idea as to why investors are flocking back onto the property market, although there is a little more to it than just rental yields.
I take a look here at why it is we are seeing so many investors returning to the market right now and why they’d disappeared in the first place.
What drove investors away from property?
Covid-19 was described by the RBA as “an unprecedented shock to the rental housing market,”2 and played a major role in driving investors away from the market and into soft assets as they struggled to protect their income.
Having our borders closed meant that a significant percentage of prospective tenants were effectively locked out of the market. Many other habitual renters were also finding themselves struggling to pay rent as businesses closed and industries tightened their belts to cope with the economic ravages of COVID-19. Moving back to the family home became common practice and many apartments and houses were left standing empty as a result.
Finally, the rock-bottom interest rates meant that more and more people were taking up the various government first home buyer incentives and purchasing their first homes.
Combined, these factors effectively forced many investors to drop out of the market and seek different ways to safeguard their earnings.
What has changed?
Our borders reopened, and lockdowns ceased just a few months before the RBA announced the first of what most people predict to be many interest rate hikes, designed to combat the inflationary pressures that our economy was feeling for the first time in years.
With a flood of tenants returning to the market, national vacancy rates have dropped to 1.2%3, while the spate of rate hikes has dampened the spirits of many potential buyers, worried about mortgage stress and increasingly expensive home loans.
With demand very close to outstripping supply, rental yields are on the up. Significantly.
According to the latest from CoreLogic, “dwelling rents are 9.1% higher across the capital cities and up 10.8% in regional areas compared to June 2021.”4
And the trend is expected to continue.
Aren't rising interest rates a deterrent to property investors?
The short answer is no, they aren’t. In fact, combined with inflation, higher interest rates tend to make property and other hard assets more attractive to strategic investors.
Buying property is considered an effective hedge against inflation. Stocks and other soft assets tend to lose value in times of inflationary pressure, and are usually outperformed by property.
Buying an investment property is generally seen as a long-term investment strategy, with capital growth providing the bass note and rental returns the melody.
With negative gearing and investment property tax deductions still on the table, many investors consider real estate investment to be a safe and effective way to safeguard their assets.
Furthermore, while we are seeing interest rates rising, they are still relatively low. For savvy investors, an investment property loan is still very affordable. With a downturn in property prices, and a significant upswing in rental yields, property investment is proving a very appealing prospect.
What are the stats?
According to the latest report from the Australian Bureau of Statistics (ABS), released in May 2022,5 loans to investors made up just over a third of all home loans at just over $11 billion, a figure that is 23.7% up on last year’s figures for the same period.
Compare this to the 9.7% drop in owner-occupier loans reported in the same document. First-time home buyers are clearly holding back, waiting to see how far interest rates will rise and how the market will stabilise in the coming twelve to eighteen months.
National rents for apartments rose 10% over the 12 months to June 2022, and gross rental yields across the country rose to 3.33% over the June quarter.6
The rental market has shifted from a tenants’ to an owners’ market, with incredibly low vacancies translating into high demand and greater rental yields. For many, now is the time to diversify and strengthen their investment portfolios by returning to the property market.
And so, property investors are back. Their expectations are that despite the short-term slowing of the market in some areas, property prices will continue to rise in the medium to long term, and that hard assets will provide a hedge against rising inflation.
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