Property Investors – Page 5 – Digital Finance Analytics (DFA) Blog

Three looming changes all investors must prepare for

What type of property will be in strong demand in the future?

Now that’s a good question for property investors to ponder, because the way we live and where and how we live is evolving.

It wasn’t all that long ago that buying a house and land in the suburbs was considered an indisputable truism of property investing. Investing in a house on a large block was considered ‘safe as houses’ (pardon the pun), and still today you’ll hear investors talk about a property asset’s value being “all in the land”.

But what was accurate only a decade or two ago is now becoming less so, particularly when it comes to real estate. For instance, while it is true that a house will depreciate in value while the land appreciates, that doesn’t mean apartments and units make terrible investments.

That’s because apartments also have an articulable land value underneath them.

And in certain markets an apartment investment makes much more investment sense than a freestanding home. This is because demographics – or the composition of Australian households – is evolving.

More of us are now trading a backyard for a courtyard or balcony due to a range of factors, including shifting family dynamics, increasing divorce rates and a growing tendency towards single-person households.

This scratches at the surface of the many evolutions that investors must prepare for if they want to enjoy long-term success in real estate. These changes include:

Our demographics are changing

In my mind our changing demographics will have more influence on the long-term performance of our property markets than the short-term influences of interest rates, bank lending policies or supply and demand.

It’s no secret that our nation is ageing, but the latest Australian Intergenerational Report reveals the significance and depth of this trend, forecasting that by 2055 the number of people aged over 65 will double.

Perhaps a bigger threat is that over the same time the ratio of people in the workforce compared to retirees will almost halve, from 4.5:1 to 2.7:1, as the baby boomers retire. In the 1970s, it was 7.5:1. This means the government will have to keep migration levels high to top up our workforce.

Another critical demographic trend is the Australian Bureau of Statistics forecast that lone-person households will see the most rapid increase of all household types — up by 65% in the next 25 years.

That means there will be about 3.4 million people living on their own, and most of these people will still want to live close to the big cities.

Let’s turn our attention back to that big house on the big block – the one that was as ‘safe as houses’.

In light of these demographic changes, how does that type of property stack up as likely to be in strong demand in the future?

The economy is changing

The mining building boom is well and truly over, and we’re becoming less of a manufacturing country.

In the future our economy will be driven by services, IT and education, which means the economic centres of growth – which will translate to wages growth and the ability to pay more for properties – will be

in our capital cities and, in particular, locations close to the CBD in our three east coast capital cities.

Furthermore, with so many Australians exiting the workforce as baby boomers retire, the government will need to address the issue of skill shortages somehow, so, as I said, it’s likely that migration of skilled workers will only increase in the future.

Our property markets are changing

Owing to the factors outlined above, the Australian property market is expected to experience increasing fragmentation, with the disparity between capital growth in cities and regional areas (and even within cities as the population grows) widening further.

Properties situated closer to the CBD, where robust economic activity, jobs and lifestyle amenities are easily accessible, will increase in value at a disproportionately higher rate than dwellings in the outer suburbs.

At the same time, there will be increased demand for apartments and townhouses as we’ll have more one- and two-person households edging out the stereotypical ‘husband, wife and two kids’ household structure.

What’s more, to cope with forecast population growth – which is tipped to almost double to around 40 million by 2055 – the Master Builders Association of Australia estimates we will need to build nine million new homes over the next 40 years.

This significant population growth will lead to a number of social issues and infrastructure challenges, and the consequential impact on Australia’s property market shouldn’t be underestimated.

Ultimately, there will always be a requirement for detached houses, but it’s becoming evident that there will also be increasing demand for medium-density and high-density apartments as retiring baby boomers trade their backyards for courtyards or balconies.

For property investors, the key to success is adopting a long-term view by seeking out properties that will be in continuous strong demand now, in the next decade, and 40 years from now.

Investors are exploiting returns on debt financing to muscle out home buyers

From The Conversation.

Investors have played an increasingly important role in the Australian housing market in recent years. Our new research shows the actual return rate for housing investors almost doubled a layman’s expectation. Experienced investors are taking advantage of the knowledge gap and might continue to price out other housing buyers.

The sharp increase in investor credit in recent years could be partly attributed to the strong growth of housing prices, particularly in Sydney and Melbourne. However, the reported capital gains might not have fully reflected investors’ actual returns as the impact of debt financing in property investment has been neglected.

Since housing investors typically use large amounts of debt to fund their investment, using the return on equity (after adjusting for debt financing) more accurately reflects their actual return.

In recent years, regulators such as the Australian Prudential Regulation Authority and lenders have implemented measures to moderate the growth of investor lending. Despite these efforts, investors have come back into the housing market since the second half of 2016.

Proportion of housing investment loans
ABS, Housing Finance, Australia: February 2017
Higher returns come with greater risk

Our research sampled properties in 14 suburbs across Sydney, using the Property Investors Alliance database. The results provide some empirical evidence to demonstrate the housing return on equity with debt financing is significantly higher, at an annual return of nearly 14% per year, than the housing return on property without debt financing of about 7% per year.

This could explain the increasing proportion of investment loans in the housing market. The knowledge of investors’ advantage should also be used to inform the ongoing debate about regulating investment housing loans to enhance housing affordability for first home buyers in particular.

It is important to highlight the effect of debt financing on decisions to invest in housing. The results clearly show the enhanced returns are likely to have an acute impact.

At the same time, a higher risk level as a result of the use of debt financing has also been documented. This highlights that housing investors should closely manage their exposure to financial risk from using debt financing by using a prudential risk-management tool.

Returns and risk on housing portfolios: 2009-2015
Author provided
Explaining the increased rate of return

We used an assumption of 20% equity to demonstrate the impact of debt financing, which is in line with the current deposit requirement from major banks. Here’s an example to demonstrate the effect of debt financing.

Say an investor buys a house for A$1 million. The investor provides a 20% deposit ($200,000); therefore $800,000 was borrowed. The investor took an “interest-only” loan with an interest rate of 5% per year – so the interest cost is $40,000 per year. The investor also receives a net rental income of $30,000 in Year 1.

A year later, the investor decides to sell the property for $1.1 million (its value having increased by 10% over the year). The traditional performance analysis of property (without debt financing) would show the return on this housing investment is 13%: ($1,100,000-1,000,000+$30,000)/$1,000,000 = 13%.

Given the housing investor used debt financing, 13% is not the actual return for the investor. The investor’s actual return on equity for the investor is 45%: ($300,000-$200,000)+($30,000-$40,000)/$200,000 = 45%.

Property returns vs equity returns
Author provided
Experienced investors exploit their advantage

Overall, the results suggest the actual return rate for housing investors is significantly higher than the layman might expect from the major housing index providers.

The documented returns may not be applicable, however, to owner occupiers who are also using debt financing, via mortgages, to buy their property. There are two main reasons for this:

owner occupiers mainly use their houses for their own residency purposes, so no rental income will be generated to offset the mortgage repayment; and

housing investors are able to sell their properties whenever they want to realise gains in value, while owner occupiers do not have that flexibility.

Importantly, experienced housing investors, in the current low interest rate environment, have realised the benefits of debt financing and taken advantage of the knowledge gap to exploit the higher returns available to them.

These findings also highlight the need for an innovative product to assist home buyers to enter the housing market.

Author: Chyi Lin Lee , Associate Professor of Property, Western Sydney University

Time to end the Treasurer’s ‘housing supply’ con

From The New Daily.

When Derryn Hinch told the ABC on Monday that “owning your own home is not an Australian right”, he was unwittingly throwing his weight behind a huge con.

That con, in essence, is to convince voters that a major structural undersupply of dwellings is responsible for the current housing affordability crisis.

The argument is utterly bogus, though Mr Hinch may not yet understand why.

When asked if young Australians had “unrealistic expectations of where they can afford to buy homes close to the city”, he replied:

“You’re right. You’re 100 per cent right … it’s the expectation that, you know, here I am, I’m married, I’m da da da da, and therefore I should have a house.

“Now, in many European countries, and you look at places like New York City, most people – I think I’m right in saying this, or it was some years ago – most people rent, they don’t buy, they can’t afford it.”

Sounds reasonable, until you look at the number of Australian residents per dwelling.

Houses have grown a bit bigger on average, but even in ‘bubble state’ NSW the average number of residents per dwelling has been virtually flat since the millennium (see chart below).

And yet our political leaders, hand-in-glove with property developers and the banks, try to create the illogical impression that average house prices have risen because people want to live close to city centres.

Treasurer Scott Morrison told the Australian Housing and Urban Research Institute in Melbourne on Monday that “… just over half of renters say they rent because they can’t afford to buy their own property”.

“Because of this, they are staying in the rental market for longer – a dynamic that puts upward pressure on rental prices and availability and even more pressure on lower-income households, increasing the need for affordable housing,” Mr Morrison said.

“Increasing numbers of higher income earners privately renting has the obvious effect of lowering availability of affordable rental stock to those on low incomes.”

The Treasurer’s logic is completely flawed.

When a renter becomes a home owner, they vacate one property and occupy another. When a high-income earner sells their home and decides to rent, they vacate one property and occupy another.

The average number of Australian residents per dwelling is not affected by that process.

If immigration, or the birth and death rates, ever get substantially ahead of the national supply of housing stock, that really would be a supply issue – we’ll know more about that when the second round of 2016 census data is released in June.

But until that happens, rising prices in one area should be offset by fewer dollars chasing properties in another area.

So why does that not happen?

Well actually, it does. House prices are falling in Perth, for instance, as mining-related workers head east to look for new jobs. Rental vacancies in that city have risen from around 1 per cent to 5 per cent in the past four years.

But those relative shifts between one capital city and another, or between inner and outer suburbs, have been dwarfed in the post-millennium era by the credit bubble that began to grow when generous discounts to capital gains tax were legislated in 1999.

Twin distortions

The 50 per cent CGT discount, combined with existing negative gearing provisions, meant that property investors could afford to borrow more to bid up house prices. As they did so, owner-occupiers were forced to try to match them.

The entire market has been lifted, like a harbour full of different-sized boats, by the same tide – cheap credit and ridiculously generous tax incentives for investors.

The two most important causes of the housing affordability crisis are, therefore, the ones Mr Morrison has already vowed not to reform.

To make planned affordability measures in this year’s budget seem plausible, Mr Morrison’s housing supply con must be maintained.

Mr Hinch should not join that effort. Owning your own home may not be an Australian right, but shopping for a home in a market that is not systematically distorted to benefit investors, developers and banks certainly is.

Multiple Property Investors And Their Mortgages

The Digital Finance Analytical core market model allows us to drill into the dynamics of households, their financial footprint and their property holdings.

We were manipulating the data recently, and found this interesting picture.

We started by looking at the average number of properties held by households as investment properties. The majority (98%) investors have just one or two properties. However, 1.6% have between 3 and 5, and a smaller number of households have even more. Many of these properties are lower-value units and houses, such as would appeal to first time buyers. This is interesting, because we know those with multiple properties are more active and account for a disproportionate amount of transactions and tax breaks. Indeed many first time buyers would simply be out-bid.

Next, we overlaid the average value of mortgages investor households have, some have total mortgages well above $1m, mostly negative geared.

Now some only have investment properties (we identify them as investors, or portfolio investors). But others have BOTH investment and owner occupied property.

So finally, we added in the average owner occupied mortgage held by these same property investing households. One striking observation is just how leveraged up those with multiple properties are, and that they have a preference for investor loans over owner occupied loans.

If you wanted to trim back the tax breaks, you could impose a limit on the value of mortgages geared, or the value, or number of investment properties leveraged or with concessionary capital gains. We think a value cap would be better than the number of properties, else, we suspect investors would simply buy a smaller number of higher value properties.

Property Investor Sentiment All Over The Place

The latest weekly data from our household surveys includes our regular question on intention to transact. Property Investors are clearly confused. In recent weeks this measure has been gyrating widely, in response to the broader media coverage of the sector and the complex interplay of issues. Last week it was up significantly, this week down.

Behind this movement is uncertainty, as interest rate rises work though, concerns about regulatory intervention reemerge, and yet on the other hand, on some measures home prices are still rising fast and auction clearances remain high.

We now expect this random movement to continue as the shake-down in the investor sector continues. Prepare for a wild ride.

Investors warned to brace for mortgage interest rate rises

From ABC News.

Real estate investors stand to be hardest hit as banks reprice mortgages to meet tougher regulatory requirements, according to a report out today.

JP Morgan’s Australian Mortgage Industry Report surveyed 52,000 households and identified that around 10 per cent of investor loans could be at risk.

The report warns that pressure for banks to increase capital levels on certain types of investor lending by three or four times current requirements could create “extreme effects”.

The most “significant changes afoot” are for investor loans that are “materially dependent on property cash flows” to service the repayments.

As a result, banks with loans dependent on cash flows could be forced to raise rates incrementally to manage the risk, potentially by as much as 3 percentage points in an extreme scenario.

Investors dependent on cash flows from rental income would also be “most sensitive” to interest rate rises of between 2 and 3 percentage points according to the research.

The warning comes as banks such as the Commonwealth and its wholly owned subsidiary BankWest consider further restrictions on investor loans to keep under regulatory requirements for growth capped at 10 per cent per year.

Investors most exposed in NSW

The report’s co-author, Martin North of Digital Finance Analytics, said investors most exposed were in New South Wales which has been the epicentre of steep real estate price growth.

“The highest sensitivity has been in New South Wales where house prices are significantly higher, as are borrowing commitments,” Mr North said.

The report also identifies risk in Western Australia and Queensland because of the mining downturn and Victoria due to an oversupply of inner-city apartments.

It warns that “wealthy seniors” and “young affluent” investors could be the most severely affected, while others such as rural families and low-income households would be least exposed.

JP Morgan banking analyst Scott Manning said it will be important for the Australian Prudential Regulation Authority (APRA) to determine how it defines loans that are “materially dependent” on cash flows flows.

Mr Manning said APRA could “reverse engineer” concerns about investor loan exposure for outcomes that would meet the need for banks to be “unquestionably strong”.

The report found that banks will be positioning themselves to minimise exposure and to meet capital requirements.

It identified the Commonwealth Bank and Westpac as having “the most to lose if heightened churn becomes a reality”, while ANZ was best placed of the big four.

CBA Cuts Investor Loan LVR

Commonwealth Bank of Australia (CBA) has reduced the maximum loan-to-value ratio for investment home loans to 90 per cent, meaning investors should ensure they have a 10 per cent deposit.

This change relates only to investment home loans and is effective immediately. There has been no change for owner-occupier home loans.

The bank has said it expects the change will affect “a very small percentage of the home loan applications” it receives.

Dan Huggins, executive general manager home buying at CBA, added: “We are constantly reviewing our home loan portfolio.

“[This] change will enable us to meet our customers’ needs, while further strengthening our high quality home loan business and ensuring we continue to meet our responsible lending and regulatory obligations.”

Property Investors Show Stronger Buying Intentions

The ABS data today showed that investor lending in January was very strong. Our weekly household surveys ask about buying intentions – a forward looking estimate based on whether they are likely to transact in the next 12 months.

We have an indication earlier in the year from our weekly tracker than perhaps investors were getting cold feet – there was talk of changes to negative gearing, lifting rates and slower home price growth. Last week the buying signals were back to normal, as investors relished in the recent strong home price growth, and Government statements that negative gearing was safe. Despite slow rental income growth it is all about capital gains.

Now here is the latest chart, with the January loan volumes also added and the latest intentions plotted. Investors are still piling into the market – expect strong auction results this weekend. Intentions are stronger than ever!

First Time Buyer Stamp Duty Cut In Victoria As Part Of Housing Strategy

Changes to stamp duty for first time owner occupiers and a vacant property tax have been confirmed by the Victorian Government today. Separately an equity share scheme was announced to assist first time buyers.

As a package of measures they will certainly impact the market, and whilst the tax breaks and first owner grants may simply lift prices, the tax on vacant properties and equity share strategies could certainly re-balance the market towards owner occupied purchasers. Our research shows there are more than 500,000 households in Victoria are currently struggling to enter the market.

Stamp duty will be abolished for first home buyers for purchases below $600,000, helping thousands of Victorians find their first home, as the Andrews Labor Government tackles housing affordability head on.

Those buying a home valued between $600,000 and $750,000 will also be eligible for a concession, applied on a sliding scale. The exemption and concession will apply to both new and established homes, in a move that is expected to help 25,000 Victorians find their first home.

In a further move to help tilt the scales back towards home owners, the Government will also remove off-the-plan stamp duty concessions on investment properties.

The off-the-plan stamp duty concession will now be available solely for those who intend to live in the property or who are eligible for the first home buyer stamp duty concession.

At the same time, a Vacant Residential Property Tax will address the number of properties being left empty across inner and middle suburbs of Melbourne.

Under the changes, owners who unreasonably leave these properties vacant will instead be encouraged to make them available for either purchase or rent.

The Vacant Residential Property Tax will be levied at 1 per cent, multiplied by the capital improved value of the taxable property. For example, if the property has a capital improved value of $500,000, the amount paid will be $5,000.

There will be a number of exemptions, recognising there are some legitimate reasons for a property being left vacant, including holiday homes, deceased estates and homes owned by Victorians who are temporarily overseas.

Each of these changes are part of the Labor Government’s plan to help more Victorians break into the housing market.

The Equity Share scheme HomesVic was also announced.

Thousands of Victorians, dreaming of buying their first home, will be able to make their dream a reality, thanks to two new changes announced by the Andrews Labor Government.

A new $50 million pilot scheme, HomesVic, will target first home buyers who are able to meet regular mortgage repayments, but because of rising rental costs, haven’t been able to save a big enough deposit.

Under the scheme, to be introduced in January 2018, HomesVic will co-purchase up to 400 homes, taking an equity share of up to 25 per cent in these properties. It will be available for both new and existing homes.

By allowing homebuyers to purchase less than 100 per cent of the property, they will require a smaller deposit and are able to enter the market sooner. In the long term, it will also mean having a smaller loan to service.

Eligible applicants will include couples earning up to $95,000, and singles earning up to $75,000. Buyers will need to have a 5 per cent deposit. The pilot will be tested across the state, and when the properties are sold, HomesVic will recover its share of the equity.

To further improve buyers’ chances of owning their own home, the Labor Government will also contribute $5 million to a national, community sector, shared equity scheme, Buy Assist.

With similar goals to HomesVic, Buy Assist will help deliver an additional 100 shared equity homes and help low to medium income households get a foothold in the property market.

The Government is also set to give first home buyers priority in government-led urban renewal developments, with at least 10 per cent of all properties allocated to first time buyers.

This approach will be used for the first time at the Arden development.

The plan to develop the 56 hectare site Arden, announced by the Labor Government last year, could be home to around 15,000 people. Under this policy 1,500 of those could be first home buyers.

Finally, in a separate release, the overall portfolio of actions were summarised under “Homes for Victorians”

Every Victorian deserves the safety and security of a home.

But for many, that’s becoming increasingly harder.

A significant number of Victorians, particularly young Victorians, are struggling to break into the housing market.

House prices are rising and upfront costs – a deposit, stamp duty and fees – quickly add up.

It’s getting harder for renters too.

Many struggle to meet high rental prices, or instead choose to live in unsuitable housing. Some don’t have the security they need, or the capacity to personalise their home as they would like.

At the same time, the number of Victorians who need to access public and community housing is growing. Waiting lists are long, and many of our existing homes have fallen into disrepair.

In short, too many Victorians don’t have a real choice about where they live, or the type of home they live in.

And as our population grows, inaction will only make things worse.

Fixing this problem isn’t simple.

It’s why Homes for Victorians provides a co-ordinated approach across government, and across our state. It includes:

abolishing stamp duty for first time buyers on homes up to $600,000 and cuts to stamp duty on homes valued up to $750,000

doubling the First Home Owner Grant to $20,000 in Regional Victoria to make it easier for people to build and stay in their community

creating the opportunity for first home buyers to co-purchase their home with the Victorian Government

making long-term leases a reality

building and redeveloping more social housing – supporting vulnerable Victorians while creating thousands of extra jobs in the construction industry.

It builds on existing work being done, including the soon to be released Plan Melbourne 2017-2050, reform of the Residential Tenancies Act 1997, the Better Apartment guidelines and the Family Violence Housing Blitz.

It also builds on our efforts to better connect Victorians with services and infrastructure. From schools to health care, roads to public transport, regardless of where they live, every Victorian should have access to the things they need.

It’s a big job, but the aim is simple: to give every Victorian every opportunity to find a home.

This Week The Investor Intention Indicator Is Down Again

We just got the results back from this week’s household surveys, and yes, we went straight to the investor intention to transact series. It is down again, now for the fourth straight week, and continues the trend we reported last week. Whilst “a swallow does not make a summer”, it could be a leading indicator of trouble ahead.

If the data is correct, the current home sales momentum is likely to slow in coming months.