They’re back: Property investors return to the residential market

Back in January, the president of the Real Estate Institute of Australia, Hayden Groves, put it plainly: “Investors are running for the hills.”

At the time rents had shown an annualised increase of up to 20 per cent – typically a calling card for property investors. But some economists were still forecasting a negative year ahead. New state regulations were coming hard and fast and crucially, the RBA was far from putting its foot on the brake for cash rates.

In its report for September, the Ray White real estate group said: “Nationally, investors continue to exit the market.”

Well, the tide has turned.

Property investors are back. Not quite with a vengeance, but back in meaningful numbers from what is effectively a standing start.

What happened? As investors sat on the sidelines through most of the year, successive monthly reports show prices and rents rising relentlessly. Sooner or later investors were going to move and in the last few months the pendulum swung. As CBA economics team has put it: “Demand from investors has outstripped that of owner-occupiers during the current upswing.”

And that’s putting it mildly.

By early December CBA was able to report: “Total new lending has been rising since March this year and monthly gains have been strong from August to October, a period when the RBA has been on hold. Over the year to October, new credit for investors is 12.1% higher and owner occupier lending is up 1.4 per cent.”

Emboldened too by an expanding consensus that interest rates have peaked, investors are hunting nationwide with clear evidence that ‘eastern state’ investors are zoning in on Perth as the city that has the most catching up to do.

Investor lending in WA jumped by a staggering 42 per cent, while the other major cities were in the mid-teens, with the singular exception of Melbourne where investors continued to steer well clear.

Investor lending in Victoria inched ahead by a paltry 3 per cent. It is no coincidence that Victoria introduced a range of new property taxes during the year.

While the market witnessed double-digit rent rises in 2022, the 12 months of 2023 have been considerably more moderate with an estimated nationwide lift of around 8 per cent.

However, the real surprise was the parallel lift in prices, which now suggest we saw an improvement of around nearly 10 per cent across the capital cities.

For investors who stayed on the sidelines – and these are averages – the price gains will be bolstered by gross rental yields slightly ahead of around 4 per cent. Even allowing for inflation cutting real returns in half, the performance has been strong and better than almost any forecaster expected.

Residential property returns are also on par with the expected total returns from the ASX this year, with the ASX 200 up 8.6 per year to date. If you add in an average 4.3 per cent dividend yield the total return is 12.9 per cent.

So nearly a year later, what is the Real Estate Institute of Australia – and its newly minted president Leanne Pilkington – saying now?

“The sentiment in the national market is quite mixed just now. We still have investors exiting in places like Melbourne and then coming into markets such as Perth. Overall, I expect investors will remain reticent until we see stabilisation for interest rates.”