Big banks bet on investors returning to property

Commonwealth Bank, led by chief executive Matt Comyn, has lowered its threshold for lending to property investors.

Big banks have upped their bets on property investors returning to the residential market as a dramatic lift in immigration points to an extended rent squeeze.

The 2023 net immigration number, which is thought to have already topped 500,000, implies that a city the size of Newcastle is now landing on top of the nation’s existing housing stock – where rental vacancy rates are close to 1 per cent.

Commonwealth Bank, the nation‘s biggest lender, announced it would allow investors to borrow up to 95 per cent of property’s value in a move that suggests the bank believes property investors are ready to re-enter the market. (The bank’s previous maximum was 90 per cent.)

Meanwhile, CBA’s big four rival, NAB, has upgraded its forecasts on the outlook for residential property this calendar year to 8 per cent nationwide, after another upgrade earlier in the year had suggested 5 per cent.

It was not that long ago investors were being told by the major banks that house prices could fall 10 to 20 per cent. It now looks like the entire peak to trough drop was about 9 per cent.

What’s more, the national forecast would have been higher except for the market’s second biggest city dragging the chain.

While Sydney is expected to rise by 12 per cent, Melbourne can expect 5 per cent. The state of Victoria has recently introduced a series of property taxes which will also deter investors from the city.

Across Australia, residential property prices have now been rising for eight months in a row. Moreover, rental income has been showing double-digit growth but investors have largely remained on the sidelines. This could change quickly.

Just now, investors as a proportion of sellers at auction at 32 per cent are running higher than average and pockets are running as high as 60 per cent in some Melbourne suburbs. However, NAB’s figures suggest the number of investors buying in the market has turned the corner with signs of early growth.

NAB says the market share of “local investors for established houses” inched up to 17.9 per cent but remains well below average.

Industry experts say the majority of these sellers are “profit takers” moving to take advantage of the cyclical opportunity where prices have risen through the year and long-held properties may sell at a profit. This would generally imply the properties were bought before the Covid-19 reversal. Nationwide, prices have just about returned to pre-Covid levels in recent months.

Long-term investors are also baulking at the sustained level of higher interest rates, especially since investors pay a higher rate than owner-occupiers.

For new investors, the investment property market presents two key risks: lack of income and high rates.

The first risk is quite literally off the table just now, with vacancy rates at 1 per cent; and with immigration running even higher than expected a fear of vacant rental properties is not an issue.

As economist Saul Eslake told The Australian’s Money Puzzle podcast recently: “Even if immigrants have the money to buy a new home, they will they rent first.”

A net immigration of at least 500,000 is expected for Australia in 2024, compared with 146,000 three years earlier.

Investors will also be weighing up if the market has genuinely reached a peak of interest rate settings as there is mixed evidence so far. The inflation data released this week may push the RBA towards one more rate lift on Melbourne Cup day, VanEck head of investments Russel Chesler believes.

“The CPI figures give the RBA no cause for a further pause; rates need to go up in November,” he says.

But inside the property market there is a sense that one more rate rise will not make a major difference, especially if there is an expectation that rates will begin to fall next year.