Investment property’s new rules

If Hobart is now dearer than Adelaide, Perth and Brisbane, what does that tell investors about the new residential property cycle?

Residential property investors are back with a vengeance. Faster than anyone might have expected, the amount investors are borrowing monthly is already level with where it was at the peak of the last investment boom in 2015.

But this market is different and anyone stepping into it should do so with their eyes wide open. Forget the old tropes about buying in the city, starting with apartments, and expecting a doubling in price every 10 years.

The migrants that once powered Sydney and Melbourne prices are missing. So too are the once powerful attractions of negative gearing (when mortgage rates were three times higher than they are now).

Consider this: there used to be a joke about Tasmanian property. The line went that once prices in Hobart started to move higher that was a signal the national market had reached a peak. In other words, the entire market had to be on fire before the embers started to glow down in Hobart.

How times have changed. According to research group CoreLogic the median house price in Hobart – at $655,000 – is now more expensive than Adelaide, Perth and Brisbane.

The investment property market in mid-2021 is two-tiered: stand-alone houses are greatly favoured over apartments and investors are moving beyond the inner-city suburbs in order to find investable housing opportunities.

Across the country we’ve had a strong 13 per cent increase in house prices already this year – economists expect this uplift can continue, finishing at 20 per cent total returns for calendar 2021, followed by a softer though still improving market in 2022. Such forecasts hinge on a slight tailing off in the rebound over recent months, but then again, the market could not have kept going at 3 per cent a month for long without social unrest and regulatory intervention.

Perhaps the outstanding feature of the market this year remains the timidity of investors against a backdrop of rising prices – they still only represent 28 per cent of buyers. During the last boom that number got to 35 per cent.

“Just for a while you had a unique situation where owner- occupiers dominated the market and you have to put that down to low rates, better-than-expected job numbers and the extraordinary success of the Home builder program,” says EY Oceania chief economist Jo Masters.

However, in late March two important changes happened. The HomeBuilder program came to an end, while at the same time bank lending to investors began a dramatic recovery – it has now doubled over the past 12 months.

For investors, the key point to note is that unit prices are only increasing by about half the pace of house prices. This is a difficulty because apartments are traditionally the entry point in the market.

In fact, there are still black spots even in the middle of cities: Melbourne may look stable with an 8 per cent lift over the year compared to a nationwide lift of 13 per cent.

But look more closely and you will find inner Melbourne has serious vacancy rate problems with a complete lack of migrants or international students.

Across the inner city, vacancy rates remain near 4 per cent and the average unit rent is now $365 a week, back to where it was in 2015.

But stand-alone houses – in Melbourne and everywhere else – are offering a very different ­picture.

The house wins

Despite warnings the house prices could not improve if the borders were locked, they have rolled higher in every city. As Masters at EY Oceania explains: “Even without our annual intake of migrants, the market has been well able to move ahead.” (Australia takes in around 140,000 migrants annually, who may take up around 50,000 dwellings).

Nerida Conisbee, chief economist at Ray White, says the drivers of higher house prices such as working from home and a defensive attitude among many investors have led to a change in the landscape.

“Investors will look much wider – they may see the prices in Sydney and Melbourne as prohibitive.

“The big city rental yields are already very low anyway so buyers are looking out to new areas that did not previously get that much attention.” In common with prices, rentals for houses are also outpacing units – unit rents are basically flat while house rentals are up around 6.6 per cent over the past 12 months.

If Melbourne units represent the market at its weakest, house prices in regional cities show where the market is heading.

New figures from global real estate agent Knight Frank, which focused on the 12 months to March, show the winners as Canberra with 16 per cent and Hobart at 14 per cent.

Moreover, the rental vacancy rates in the five smaller cities (Adelaide, Canberra, Darwin, Hobart and Perth) had halved from 2.4 per cent to 1.2 per cent, an indication that houses in smaller cities are often not just outpacing the metropolitan centres in price but are also more “rentable”.

Of course, if you look back at the last peak of the residential cycle, which topped out in 2015, there were already elements of what we see today taking place.

Highly sought-after regional spots had been doing very well – not just the lifestyle towns of Byron Bay and Noosa, but also mining towns where a genuine scarcity of accommodation made the existing housing stock very valuable, especially as “potential” income earners. As the mining boom cooled in those towns many investors were caught in what was clearly a speculative bubble that had a clear timeline linked with the commodity cycle.

At present, iron ore prices are at a record-breaking $200 a tonne. To some extent this underpins the rebound in cities such as Perth, and it completely explains renewed interest in mining towns such as Port Hedland.

If house prices are up 13 per cent over the past 12 months nationwide, what’s the number for Port Hedland? It’s 34 per cent! Which sounds great if you did not know that prices closed in on $900,000 in the last boom before retreating to the $350,000 range they occupy today.

Will the speculative end of the new investment property cycle extend to mining towns again?

“Investors have learned a lot since the last cycle: they found out that prices don’t always keep rising – in fact they saw two distinct periods where prices fell since the last peak. I’d like to think that people are much more educated and won’t make the same mistakes again,” says Conisbee.

Well, you’d like to think so.