Getting out before the rush? Private investors quitting property

High interest rates and government tax hits have forced a rethink by private property investors.

Property prices have been rising for eight months in a row and rental demand is surging. So why are investors quitting the market now?

Because it may be their last chance to get out of the market at prices which are 4 per higher than a year ago.

Industry analysts say a mixture of sharply increased “holding costs” and a mixed outlook for further capital gains have combined to trigger a run of investor sales.

For many longer-term investors, this spring auction season has been a long time coming – and the opportunity window to sell investments may not be open for long.

Preliminary auction clearance rates released on Monday show that the auction clearance rate across the market has dropped below the key 70 per cent rate for the first time in three months.

Behind the modest price improvement this year to date, investors are now facing exceptionally high interest rates. Property investors with self-managed super funds, for example, face a standard variable rate of 9.1 per cent. At the other end of the market, first-time buyer owner occupiers could still be paying close to 6 per cent.

Meanwhile, although double digit rent rises have been widely reported, the higher income from investment property does not come close to covering what can be a doubling of monthly interest costs.

With residential prices now returning to pre-Covid levels, CoreLogic research director Tim Lawless says “ some investors are taking their profits while they can”.

What’s more, nationwide inflation above 5 per cent means the majority of private property investors are going backwards in real terms, even if they did not face a doubling of interest costs.

Victoria – one of the weakest markets – has been recently hit with a fresh round of taxes by the state government. Among the changes, second homes will now be taxed an extra $5000 for every $500,000 on the “capital improved value” of the property. Dubbed the “vacancy tax”, it includes holiday homes.

Nonetheless, prices are higher across the state, according to numbers released Monday by the Real Estate Institute of Victoria. According to the REIV, for the first time since June 2021 houses and units across Melbourne all recorded growth in the three months to September.

Only metropolitan Melbourne houses showed a quarterly decline at minus 0.2 per cent.

Moreover, units and apartments – the first rung on the ladder for many investors – rose strongest. Inner Melbourne houses rose 0.6 per cent in the quarter, while units were 1.9 per cent higher.

Victoria leads the way with investors quitting the market and investor-owned listings are now at 60 per cent compared with 51 per cent a year ago. Nationwide, the figure is closer to 32 per cent.

“What we have in Victoria is a perception that there has been a sequence of extra regulations and impositions – and it’s definitely having an impact on sentiment across the market,” says REIV president Jacob Caine.

Investors will be acutely aware that if overall listings are increasing, then prices could moderate – if not reverse the string of successive gains which the market has reported this year.

Paradoxically, private property investors have better credit records in the property market than owner occupiers, which means the pricing should be reversed with investors paying lower rates – but that is not happening across any of the banks.

State regulations continue to change around property ownership. Along with raising land taxes Victoria has also imposed a substantial 7.5 per cent levy on income gained from Airbnb rentals.