What are property investors going to do in this Covid-19 affected property market?
While our property markets are in general driven by home owner demand, investors obviously play important role in determining where property prices are headed.
How these forces will play out moving forward was the subject of recent commentary by Westpac in their latest housing market update.
But before I share Westpac's commentary, I'd like to let you know my views based on the enquiries we've been receiving at Metropole.
In general the economists try and work out investor demand based on loans taken out to purchase investment properties and I can understand why.
In the last 6 weeks our enquiries from investors to Metropole have been the strongest we've experienced in over three year .
We're finding investors are very keen to take advantage of the current lull in the property market.
Let me say that differently...more strategic investors with a long-term view, in particular those should be around the block a few times, are very keen to take advantage of the current lull in the property markets
The big challenge they are facing is the changing lending environment and the difficulty they are having obtaining finance.
Having retreated to multi–year lows in 2019, investors are unlikely to return to the Australian market in 2020 but may come back seeking yield, particularly once prices have stabilised.
Investor activity is coming into the current downturn already at a low ebb.
The housing market is driven by owner occupiers, where affordability and expected affordability are key, and by investors where conﬁdence dominates.
The best proxy we have for aggregate investor activity is the value of new investor loan approvals – an imperfect measure as it is inﬂ uenced by shifts in prices, the degree of leverage on new loans and composition – but one that should still broadly capture the investor cycle.
The value of investor loans has fallen heavily in recent years, initially as macro–prudential restrictions came into eff ect, then as a price correction gathered momentum in 2017–18 and ﬁ nally as fears about potential changes to tax policy spooked the sector ahead of the 2019 Federal election.
Notably, despite tax changes being taken off the table post-election and the rebound in housing markets over the second half of last year, investor activity has remained relatively subdued, the value of ﬁ nance approvals to the segment rising just 5.7% over the year to March compared to a 22.5% surge in the value of loans to owner occupiers.
As a share of the total market, investors currently make up about 26% of the value of loans, down from a peak of 39% three years ago and 42% in 2015.
Clearly, investors respond to somewhat different signals than owner occupiers.
To try and capture some of these differences, we have developed a new sentiment–based indicator – an investor composite index along the lines of the Westpac Consumer Housing Index measure.
This ‘experimental’ index is shown in Chart 15 below.
Note that, as with our regular composite, the measure is shown in annual change terms, with the focus on capturing turning points in the cycle.
It is shown against the annual change in investor ﬁnance approvals (expressed as a % of the total value of the housing stock in order to allow for the impact of both price changes and growth in the total size of the housing market over time).
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In terms of its construction, the composite gives a heavier weight to house price expectations and includes the real estate response to the ‘wisest place for savings’ question instead of the risk aversion measure used in our main composite.
Unemployment expectations and ‘time to buy a dwelling’ are also included, although the latter has a very low weight of just 5%.
The latest readings seem to perform well – showing a more muted revival since mid–2019 and a sharp shock through April–May (reﬂecting the deeper impact on price expectations which dominate the investor index).
The May reading is consistent with a 35% drop in the value of investor ﬁnance approvals – a fall that would take activity to a record low but be broadly in line with what we have seen across the wider market in recent months.
It should be noted that there are some positive supports for investor demand.
Rental yields, in particular, are both comfortably above the cost of ﬁ nance (especially compared to ﬁ xed rate loans) and attractive relative to returns on other assets (deposit rates and the dividend yield on equities).
That said, our new composite suggests sentiment – speciﬁcally, price expectations – will be the overriding factor near term.
Source: Westpac Housing Pulse 2020. This material contains general commentary only and is not intended to constitute or be relied upon as personal financial advice.
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