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Incoming – Investors Snapping Up Property in Droves

Investors are making their way back into the property market, even though the word on the street is that prices will plummet by 10-15 per cent in the next 18 months as inflation rises, employment grows and construction companies struggle with the term ‘insolvency’ due to exorbitant labour costs and material shortages.

At the beginning of 2021, we saw investors evacuate the real estate market as 1) The New Residential Tenancy Act brought on tougher rules when owning an investment property, 2) the overseas student market wasn’t coming back anytime soon thanks to Covid restrictions, and 3) vacancy rates were the highest they had ever been, especially in the CBD and inner suburbs. If you look at the whole mortgage market over the past decade prior to Covid, investment properties attributed to 35 per cent of the market, whereas at the beginning of 2021, only 23 per cent of the mortgage market were for investment properties. That’s a huge hit of losses for renters trying to find a home.

Now, investors see the light with increased yields and stronger rental demand as overseas students return and local students want some independence, thus creating supply shortages. Rent rises have seen as much as 20 per cent in recent months, with houses averaging around 15 per cent, and units about 10 per cent, according to SQM Research. Melbourne is seeing gross rental yields of around 2.8 per cent, according to Core Logic, with vacancy rates hovering under 2 per cent.

With Labor coming back into power and the Greens holding the balance in the Senate, SQM sees that while the Greens want property investors to only be allowed to negative gear one property, the current Prime Minister may move cautiously on their request, based on his own personal investment portfolio. However, Labor didn’t have a policy to help renters and their hardships to find affordable housing, which gave more incentives to investors to buy back into the market.

And then, the Victorian State Budget at the start of May 2022 also took the heat off the property market, with no announcements of increased property taxes, which was also a welcome outcome for investors, contributing to their determination to return to the market.

Investors also understood that while overseas students got the green light to return to Australia back in December 2021, there is a process for them to enter our borders. Most international students need to get accepted into a course and get their student visas before renting a property. They wouldn’t have had time to start the 2022 university year, so they prepare themselves for a mid-year entry or 2023 university intake.

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Investors are also preparing for population growth. With Australia expected to add an additional 3.5 million residences over the next 10 years, there is more need for investors to provide mid-long term rental properties, as migrants move to our shores for our fantastic job opportunities, culture and infrastructure, however, this rate of growth is slightly less than what we saw in the five years prior to the Covid outbreak.

The growth rate will see Melbourne to be the largest Australian capital city in the next decade, so while the media see the current state of the market as a ‘flat patch’, investors see it as a time to buy. Investors are buying established properties because the supply of new homes is grinding to almost a halt, due to 30% or 328 building companies trading insolvent or entering administration in the December 2021 quarter, according to the Australian Securities and Investments Commission.

New dwelling approvals were down 36 per cent over the year, ending March, with new dwelling construction taking a record 12-month average, double the time it took in 2019. Until this construction pain eases, there will be an imbalance between future buyer demand and stock availability, so investors seek established properties to capitalise on the strained housing market.

Social housing is the issue when it comes to our growing population. While we heard about troubled Metricon’s $30million lifeline from the Commonwealth Bank and that they have a Victorian government contract worth $195million in a five-year deal to build and maintain public housing with the ‘big build’ infrastructure program, the reality is, only one in every 20 homes or 5% are built for social housing across Australia, whereas in the 1950s and 1960s, 16% of the homes built were for social housing, which puts a strain on our housing system, making it more appealing to private investors to harness the shortfall.

There are only 40,000 vacant rental properties around the country, equating to 1.1%, according to SQM Research, a far cry from three years ago when there were 75,000 vacant rental properties available, highlighting that there is a rental crisis, according to Nicola McDougall, the chair of the Property Investment Professionals of Australia.

It all points to investors feeling more confident in the marketplace especially, knowing that while they are paying higher interest, they can make more income and balance the books with opportunity to negative gear. All long term investors know that riding the waves is the key to property price growth.

Getting in now as the peak of Melbourne property prices has waned, balances out with disheartened first home buyers wanting to have their own home, and reducing their affordability to do so, as lenders clamp down on the amount first home buyers can borrow as interest rates rise. The competition with first home buyers for investment grade properties is still there, but now investors are competing with each other, thanks to the short supply.

And as for price growth, while the sceptics are putting the fear into the market, the reality is, by the end of 2022, property prices will have grown, home values are expected to be 5% higher than they were at the start of the year, and units 3-4% higher. Investors know, that the average annual house price increase over the past 40 years has been 7.8% per year in Melbourne. It’s about the long term. Investors know it, and that’s why they want ‘in.’

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