Housing investment rebounding on improved market conditions and a narrowing spread between rental yields and mortgage rates.
The value of home loans committed to by investors has recorded a sharp rise since June, rising a cumulative 11.6% over the three months ending August 2019; the fastest rate of growth in the value of investment loan commitments since November 2016.
The rise in investment activity comes after a period of relative inactivity, with investor participation falling from 43% of market activity in mid-2015 to a recent record low of 25.8% in July this year.
Also, investors have been paying a mortgage rate premium over and above owner occupier rates which averaged 58 basis points in September.
The slowdown in housing market conditions was another factor in slowing investment activity, as prospects for capital gains evaporated.
More recently, housing market conditions have turned a corner, with values rising across five of the eight capital cities over the September quarter and three of the broad ‘rest of state’ region.
The improved prospects for capital gains are no doubt one of the attractions bringing investors back to housing.
Additionally, credit policies have loosened and lenders are becoming more competitive for investment borrowers.
Another incentive for a rise in investment is the narrowing spread between mortgage rates and rental yields.
The average interest rate on a three year fixed mortgage product for investors was 3.8% in September; only one basis point higher than the combined capital city gross rental yield (3.7%).
The spread between fixed rate mortgages and gross rental yields hasn’t been this narrow since at least 2005, which is when CoreLogic yield data commences.
With such a narrow gap between rental yields and mortgage rates, more properties are likely to be in a positive cash flow scenario from the outset of the purchase.
Every state and territory has seen a lift in the value of investment loans, with the largest rise over the three months ending August in Victoria and Queensland, where the value of investment home loan commitments was up 19.1%.
Proportionally, investment activity is most concentrated in NSW where investors comprise 31.2% of mortgage demand based on the value of loan commitments (excluding refi’s), followed by Victoria (26.4%) and Canberra (26.0%).
Western Australia, where housing values have been falling since 2014, shows the lowest share of investors at 15.4%.
Looking forward there is a strong likelihood that investor activity will increase further.
The long term average shows investors are typically around one-third of mortgage demand, implying investors are currently under-represented in the market.
As investment activity rises we could see increased price pressures as this sector of the market tends to be more competitive in setting new price benchmarks.
A bi-product of higher investment activity is likely to be fewer first home buyers.
The trend in these two segments of the market is typically counter to each other; more investors / less first home buyers and vice versa.
Read more: propertyupdate.com.au