We continue the results from the latest Digital Finance Analytics household surveys, by looking at property investors, who now make up around 35% of all residential property borrowers. This is much higher than in any other similar economy (e.g. UK 17%). The appetite for investment property is still strong, and despite some tightening of lending criteria and slowing capital growth momentum, investors still wish to transact. Bank lending to investors in June 2016 rose by 0.1% or $0.6 billion.
As a reminder, we showed that investors (either those with one or two properties – solo investors, or those with a portfolio of properties – portfolio investors) were the most likely to purchase, even compared with those seeking to refinance.
The driver to transact relate firstly to the tax effectiveness of the investment (37%) and capital gains from appreciating property values (25%). Low finance rates are helping, and investment property is perceived as offering better returns than bank deposits or stocks. We know that many in the eastern states will not make positive pre-tax returns, but taking tax breaks into account, they are still ahead, and will remain so unless there is a significant fall in home prices.
There are some barriers which investors have to negotiate, the most obvious is they have already bought (40%), potential changes to regulation (25%), and inability to get financing (15%). Risks relating to budget changes have dissipated, and some are concerned about static or falling rents (bundled in the other category at around 5%).
Solo investors have similar drivers with a focus on tax efficiency and potential capital gains, supported by low finance rates. We note that they have lower expectations of future gains than other investors (portfolio and those investing via SMSF).
Looking in detail at SMSF property investment, tax effectiveness, leverage and potential capital gains all drive the decisions. We did note some concerns about changes to superannuation regulation, especially around the caps, but this has not deterred prospective purchasers.
There are about four percent of SMSF’s holding residential property, and typically it comprises just a proportion of the total fund. A further three percent are actively considering adding in property to their SMSF.
It is also worth noting that mortgage brokers are becoming more influential in providing advice to trustees seeking SMSF advice, alongside accountants. Internet forums and web sites still play a significant role in providing advice to trustees. 17% say they know enough, and rely on their own knowledge and experience.
Finally, we highlight the “honeypot effect”, where interstate investors prefer to buy in the more buoyant states of NSW and VIC, than in their home states. We discussed this in detail in a previous post. And of course some first time buyers are going direct to the investment sector.
So, investors will continue to sustain the market, and should the RBA cut rates again tomorrow, we should expect additional momentum, thanks to lower funding costs and paltry returns from bank deposits. Property investors are making logical decisions, given past performance, but at some point the tide just has to turn. But at the moment, returns from property simply outperforms other investment classes, and are perceived to be “as safe as houses”.
Next time we will round out the survey results by looking at some of the other property active segments.
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