Bullish or bearish: Investor activity now drives housing markets
Jul 05, 2018
A significant reduction in bullish activity from investors has turned prospective owner-occupiers bearish in the housing market.
Bull markets and bear markets are terms normally used in reference to equities markets, but similar philosophies can also be applied to real estate.
In a bull market activity tends to be high and there is a positive energy which stimulates prices and more urgent activity. The opposite dynamics are typically reflected in a bear market, with a downturn in prices and activity, and a loss of energy in the market.
According to www.riskwiseproperty.com.au CEO Doron Peleg, property investors have increasingly been responsible for bullish sentiment over the past decade.
“When the investor bulls leave the market so too does the energy which drives that market,” Mr Peleg said. “Investor interest is aroused when the market is going up and we see more activity. The investor cohort today has a very material impact on the residential market, particularly in Sydney and Melbourne.”
According to the latest report from RiskWise & WargentAdvisory, titled Impact Analysis: Negative Gearing, CGT & Australia’s Residential Property Markets, credit restrictions and tighter lending standards have had a direct impact on the Australian housing market resulting in fewer active property investors.
Dwelling prices in Sydney and Melbourne initially recorded a decelerated growth rate, followed by price reductions in Sydney and, to a lesser extent, Melbourne. CoreLogic has already reported that the annual rate of dwelling price growth had significantly dropped to Australia’s lowest since October 2012.
The graphic below shows the market share of investors against owner-occupiers in two different timeframes: when investor activity was high and when it was low.
“The number one indicator for market sentiment is investor lending finance (excluding refinancing). If you see there is no increase in investor activity - the dynamic likely to prevail at present due to credit restrictions as detailed in our report - you will also see the annual rate of dwelling price growth slows significantly. In aggregate, therefore, you cannot now expect to see any price growth in the major markets,” Mr Peleg said.
“The second measure we need to look at is the interaction between investor activity, auction clearance rates in the major markets and dwelling prices.”
He said the impact of investor activity on the housing market had been clearly demonstrated over a prolonged period which included the global financial crisis, the boom and subsequent downturn in resources construction, and increases and decreases to mortgage rates. Investors have been proven to be significantly more sensitive than owner-occupiers to changes in out-of-pocket expenses, driven by interest rate fluctuations, changes in legislation or other events.
“Our report accords with the Reserve Bank of Australia’s findings that investors can amplify credit and dwelling price cycles, on some occasions contributing to financial stability risks,” he said.
He said that the RBA had also found that investors might be more likely to sell their properties when prices were expected to fall, since these dwellings were an investment rather than their own homes. Conversely, periods of rapidly rising prices might create the expectation of further price rises, drawing more bullish investors into the market, especially as capital gains can form a larger part of their decision to purchase.
“Investors purchase more off-the-plan dwellings than owner-occupiers, so this cohort can contribute to larger upswings in residential construction with the risk of future oversupply for some types of properties or in some locations. Conversely, elevated levels of investor activity may amplify any subsequent downswing, increasing risks to the broader housing market and household sector.”
He said the Impact Analysis: Negative Gearing, CGT & Australia’s Residential Property Markets report detailed the impact of credit restrictions and investor activity and, consequently, the impact on the residential property market, which had also been acknowledged by the major banks and lenders. The Commonwealth Bank of Australia (CBA), in its half-year results for 2018, stated ‘investor demand is slowing following APRA’s latest regulatory changes, falling price growth expectations and higher interest rates from the major lenders’.
Mr Wargent, of WargentAdvisory, said CoreLogic also suggested that regulatory changes and a mortgage rate differential has materiallyimpacted investment lending, with both the stock and flow of interest-only loans being significantly reduced.
“If we don't see any increase in investor activity we won’t see any broader improvement in the major markets. The prevailing dynamic has taken the energy out of the market, and when there is low energy and little aggressive bidding at auctions, property prices tend to decelerate or stagnate,” he said.
“When activity is high, the energy returns to the market and this in turn has an impact on owner-occupier sentiment and activity. While dwelling types are not fully substitutable, the different cohorts may compete for the same properties and we need to understand the connection between them.
“This is a fundamental issue to understand: the ebbs and flows of investor sentiment now have a significant impact on market activity, dwelling prices and construction cycles.”