Investors continue to drive Sydney but why?

The latest housing finance data shows that housing finance commitments to investors were at a historic high in New South Wales.

The difficult thing to reconcile is why is investor participation still increasing at this stage in the growth cycle?

According to the latest RP Data-Rismark Home Value Index results for July 2014, combined capital city home values rose by 10.2% over the year.

The growth in values across Sydney has been significantly more substantial at 14.8%, the strongest amongst all capital cities.

Since Sydney home values reached a recent low point in May 2012, home values have risen by a cumulative 24.9% across the city. Over the same period, combined capital city home values have increased by 17.4%.

Keep in mind that given Sydney is the nation’s largest capital city it has a significant impact on the combined capital city figure. Since May 2012, Sydney house values have increased by 26.9% compared to a 21.5% rise in unit values.

You can see from the first chart that value growth across the other capital cities has been more moderate than Sydney’s value growth.

RP Data Property Pulse - research article

The latest housing finance data shows that the level of market participation by investors is at a record high across New South Wales (which is obviously a proxy for Sydney).

In May 2014, there was $5.86 billion in housing finance commitments to owner occupiers in New South Wales compared to $5.18 billion for investors.

This meant that investors accounted for a record high 46.9% of NSW housing finance commitments in May 2014. If you remove refinances, investors accounted for a higher 56.9% of commitments in May, or more than one of every two new loans.

The last time the proportion of lending to investors in New South Wales was at a similar level was late in 2003. Late 2003/early 2004 was the peak in the cycle which ran from early 2001 in Sydney.

In the aftermath, Sydney home values fell by 8.2% lower from their peak in March 2004 to their low point in December 2005. Home values also took until March 2009 to return and remain higher than their March 2004.

RP Data Property Pulse - research article

The evidence clearly suggests that investors are targeting the Sydney housing market, much like they did between 2001 and 2003. Interest rates are much lower now than they were between 2001 and 2003 which is certainly contributing to the heightened level of investment activity.

Risk free asset classes such as term deposit rates are subsequently also much lower. As at June 2014, the 12 month term deposit rate was 3.3%, comparatively the lowest level they reached between 2001 and 2003 was 3.6% while they averaged 4.0% over the period.

Very low returns from risk-free asset classes are pushing investors to asset classes such as residential housing which have a comparatively higher risk profile.

RP Data Property Pulse - research article

Sydney home values may have increased by 24.9% between May 2012 and July 2014 however, gross rental yields have fallen from 4.5% to 3.9%.

The very low rental returns suggest that most investors are chasing capital growth. Certainly investors who purchased two years ago have enjoyed strong value growth but, investment is spiking now, at time when the growth cycle is very mature and rental yields are around historic lows.

Over the past five years, Sydney has seen the greatest total value growth amongst the four largest capital cities at 34.0% followed by 28.7% in Melbourne, -0.1% in Brisbane and 10.3% in Perth.

If we take a much longer-term view, Sydney has actually significantly underperformed both Melbourne and Perth but slightly outperformed Brisbane.

Over the past 20 years, home values have increased by a total of 263.7% compared to 359.4% in Melbourne, 231.3% in Brisbane and 315.9% in Perth.

It is difficult to imagine the growth in values of the past being replicated over the coming 20 years especially in light of weaker recent economic conditions and the current cost of housing.

RP Data Property Pulse - research article

Housing is typically viewed as a long-term asset class which appreciates in value moderately over time. Obviously value growth has been strong recently in Sydney and this is luring investors to the market however, the best time to be entering this market was more than two years ago not now.

The concern is that investors are looking at Sydney for short-term capital growth. Once this growth is no longer there we may see an exodus of these investors from the market.

Should this occur it could have a significant impact on values of homes in investor-centric markets across Sydney.

The key theme here is that investors entering the Sydney housing market now should tread carefully. Although growth is currently quite strong, recent history has shown that Sydney values rise at a more moderate pace than other capital cities.

Furthermore, the cost of investing in housing is high and it isn’t a liquid asset so exiting a property in a weak market can take a long time plus the exit costs can be quite high once you factor in costs such as agent commissions and conveyancing fees.



Want more of this type of information?


Cameron Kusher

About

Cameron Kusher is Corelogic RP Data’s senior research analyst. Cameron has a thorough understanding of the fundamentals such as demographics, trends & economics. Visit www.corelogic.com.au


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