Where Investor Demand Has Increased in 2023
In recent months, reduced borrowing capacities due to fast rising interest rates has dampened homebuying demand and with it demand for new housing loans.
For all borrower types, new lending has fallen and the value of new lending to investors was down 34.8% year-on-year in January and 35% lower than peak levels recorded in March 2022. The number of new loans to investors almost halved from that peak to hit the lowest level since August 2020.
Although the value of new lending to investors has taken a hit, the share of overall lending to investors has only declined a little since mid-last year, holding around one third (33.5%) of all new mortgages. That’s well up from the 2021 lows of closer to just one fifth (22.8%) of new lending.
Throughout 2021 and into the first half of 2022, investor activity increased to a local cycle high, reaching just over 35% share of all new lending, the highest it’s been since 2017 when macroprudential measures sharply impacted investor activity.
A look at where investor enquiry has most increased in the past year
The overall volume of enquiry from investors fell 20% over the calendar year 2022 as interest rates quickly climbed and the housing market rebalanced off 2021’s extremes. The volume of investor enquiry fell in four out of five suburbs Australia-wide.
However, irrespective of the fast rise in interest rates and shift in market conditions, there are some regions that have seen increased investor activity in comparison to the previous year.
According to enquiry data, investors set their sights predominantly on Western Australia in 2022, with the number of enquiries from investors more than doubling in parts of the state throughout the year. Some parts of regional Queensland and Adelaide were also popular.
Lending indicators data from the Australian Bureau of Statistics released earlier this month corroborates the enquiry data, showing the value of investor loans in WA has only fallen 9.6% year-on-year, compared with a 34.8% decline nationally. And when comparing the past year with the corresponding 12 months prior, the value of new lending to investors in WA is up 26.2%.
Investors turn their attention to the North and West
Rental markets in Perth have been tight for some time and vacancy rates dropped sharply in 2020, with very limited supply. The same is true for parts of regional WA. Rental markets are tight Australia-wide, and at a national level, advertised weekly rents on realestate.com.au surged by 9% for houses and 12% for units over the past year.
Perth now has the tightest rental market in the country with the lowest rental vacancy rate among the capital cities of just 0.85%. Rental yields are also some of the highest nationwide in the suburbs of WA and regional Queensland, likely piquing investor interest.
Prices in WA are some of the most affordable in Australia, which is probably another driver of the increase in investor demand. The share of mortgage repayments for an average income household on a median priced dwelling in WA is less than in every other state, with the exception of the Northern Territory. And again, with the exception of Darwin, Perth is the cheapest capital city. The median value of homes in Perth is currently sitting at $564,000 and $606,000 in regional Queensland, another comparatively affordable region, as of January 2023.
Relative affordability was also a factor underpinning conditions in these markets in 2022 with more expensive regions experiencing a faster pace of price falls.
After the large and fast adjustment in interest rates since May last year, with maximum borrowing capacities for potential buyers now reducing by close to 30%, price is likely to have been, and will continue to be another driver of the increased investor demand in more affordable regions.
Some regional WA suburbs, particularly those tied to the mining industry, have increased in popularity among investors, with strong yields and tight rental supply keeping rental prices high.
Adelaide, another rental market facing incredibly tight rental supply and record low vacancy rates has also experienced strong rental price growth.
Suburbs in Adelaide are also among those who saw the largest increase in investor interest in comparison to the year prior.
Home prices in Adelaide are also more affordable compared to the larger capital cities, with the median value of homes currently sitting at $648,000, making the price point attractive in the face of significantly reduced borrowing capacities. In terms of Sydney suburbs, there are only three that make the top 50, with two of those actually making the top 10 suburbs with the greatest year-on-year increase in enquiry from investors.
Ultimo, an inner-city suburb, set to benefit from returning international arrivals and rebounding numbers of student arrivals saw enquiry from investors more than double.
Inner city rentals are in short supply and weekly rents continue to rise. Home price growth in the inner city has also underperformed relative to coastal and outer suburbs over the past three years, meaning these regions present a relative discount in some cases, particularly in the apartment market.
Clovelly, a more affordable suburb compared to others in Sydney’s eastern suburbs region that has seen some of the strongest rental price growth of anywhere else in the city over the past year. It also saw investor enquiry more than double through 2022. New data from PropTrack revealed the top 10 Sydney suburbs for growth in weekly house and unit rents, with Clovelly topping that list.
Sydney’s rental market was hard hit through the pandemic, but as life returned to normal and international borders reopened last year, rental demand quickly returned,. with conditions tightening fast for much of last year.
These tough conditions are ongoing and expected to remain with strong rental demand and tight supply seeing asking rents continue to rise.
Interestingly, there is not one Victorian suburb in the top 100 suburbs where investor enquiry most increased through calendar year 2022.
In terms of where the absolute level of investor enquiry was highest throughout the calendar year 2022, unsurprisingly larger, higher density inner city suburbs and regional centres hold the top spots.
However, in most of these locales, investor enquiry dropped off compared to the level seen in 2021, with the exception of Brisbane City, Melbourne, Redbank Plains, and Adelaide.
Brisbane City saw a 51% year-on-year increase in enquiry from investors throughout 2022. Home prices in the city have surged since the pandemic onset, rental price growth has also been strong, and properties are renting out very quickly with heightened demand for rentals in the city.
Although the affordability advantage has compressed, the city remains affordable in comparison to Sydney, Melbourne and Canberra. And elevated net migration into Queensland since the pandemic onset has underpinned already strong rental demand, with population growth surging.
What could 2023 hold for investors?
Rising interest rates have dented affordability and legislative changes are adding pressure to landlords. But with Australia in the grip of a rental crisis, markets remaining tight, and strong rental demand ongoing, what’s next?
Rental vacancy rates are sitting at historic lows – and rents are rising. Immigration is rebounding strongly, which will add to rental demand for landlords as new migrants and international students are significantly more likely to rent than buy when they first arrive in the country. Particularly in the major capitals, where we know migrants are most likely to rent – and predominantly in the inner and middle ring suburbs of Sydney and Melbourne.
The latest population data from the ABS indicated the September quarter of 2022 brought the largest quarterly increase in net inward migration on record.
The latest overseas arrivals and departures data, a good proxy for the less timely migration data, continues to point to those strong inflows having continued into this year, with net permanent arrivals rebounding fast to pre-pandemic levels and on track to well outpace Treasury forecasts.
Alongside the competitive rental market conditions, declining property prices and rising rents have meant rental yields are recovering off Covid lows. However, with changing legislation occurring alongside the significant reduction in borrowing capacities, rising mortgage servicing costs, reduced capital growth prospects, and uncertainties around where interest rates will land, investors remain hesitant.
Investor loans are continuing to trend lower, with the number of new loans to investors down from the peak of activity in March 2022 with 21,663 new loans to just 11,485 in January 2023, a fall of 47%. Though that’s still up 27% from the just 9034 loans to investors in May 2020.
Once interest rates pause their climb, as they are expected to this year, investor activity may begin to increase if uncertainty reduces and confidence increases.
This will be welcome news for tenants, with the beginning of an ease in the critical undersupply of rental properties that has been exacerbated by reduced investor activity. Although, without a significant increase in activity, this is unlikely to cover the meaningful increase in supply of rental accommodation that’s needed.
Tough rental market conditions may also encourage others into home ownership sooner than otherwise and together with investor activity, strong rent growth has potential to offset the downwards pressure from rate rises and buffer price falls in some parts of the country.
** Article is written by Eleanor Creagh, Senior Economist, Proptrack
