The accelerated increase in interest rates has led to decreased borrowing capabilities, resulting in a decrease in demand for home purchases and consequently, a decrease in demand for new housing loans. The value of new lending to investors has decreased by almost 50% since March 2022.
Investor interest is increasing in Adelaide suburbs, with several suburbs ranking among the top areas with the highest year-on-year increase in enquiry from investors. In Sydney, investor interest is increasing in only three suburbs, with two of those making the top 10 suburbs with the greatest increase in enquiry from investors.
Although Sydney's rental market was hard hit during the pandemic, demand has quickly returned and asking rents are expected to continue rising. No Victorian suburbs made the top 100 suburbs where investor enquiry most increased through the calendar year 2022.
Brisbane City experienced a 51% year-on-year increase in investor enquiry throughout 2022, due to the surge in home prices and strong rental price growth in the city since the pandemic began.
The demand for rental properties is likely to increase further as immigration rebounds, especially in the major cities' inner and middle suburbs, such as Sydney and Melbourne.
Investor activity may pick up once interest rates pause their climb and uncertainty reduces and confidence increases, which will be good news for tenants. However, it is unlikely to fully cover the significant increase in rental accommodation needed.
Over the past few months, the accelerated increase in interest rates has led to decreased borrowing capabilities, resulting in a decrease in demand for home purchases and consequently, a decline in demand for new housing loans.
This has resulted in a drop in new lending for all types of borrowers, and in January, the value of new lending to investors was 34.8% lower than the same period last year and 35% lower than the highest levels reached in March 2022.
Furthermore, the number of new loans granted to investors has decreased by almost 50% since that peak, hitting the lowest level observed since August 2020.
Despite the decrease in the value of new lending to investors, their overall share in lending has only slightly decreased since the middle of last year and remains around one-third (33.5%) of all new mortgages.
This is a significant increase from the lows seen in 2021 when they accounted for just one-fifth (22.8%) of new lending.
Investor activity had been on the rise in 2021 and the first half of 2022, reaching a local cycle high of just over 35% of all new lending.
This was the highest it had been since 2017, a year when macroprudential measures had a sharp impact on investor activity.
In 2022, the overall volume of investor enquiries decreased by 20% due to a rapid increase in interest rates and a rebalancing of the housing market from its extremes in 2021.
Four out of five suburbs across Australia experienced a drop in the number of investor enquiries.
However, despite the changes in market conditions, certain regions showed an increase in investor activity compared to the previous year.
Enquiry data indicates that Western Australia was a popular destination for investors in 2022, with the number of enquiries more than doubling in some parts of the state throughout the year.
Additionally, some areas in regional Queensland and Adelaide saw an increase in investor interest.
The Australian Bureau of Statistics' lending indicators data, released earlier this month, supports the enquiry data.
It shows that the value of investor loans in Western Australia only fell by 9.6% year-on-year, compared to a 34.8% decline nationally.
Furthermore, when comparing the past year with the corresponding 12 months prior, the value of new lending to investors in Western Australia increased by 26.2%.
Investors are increasingly turning their attention to suburbs outside of Australia's major capital cities, according to recent data. In particular, Adelaide has seen a significant increase in investor interest, with several suburbs ranking among the top areas with the highest year-on-year increase in enquiry from investors.
One of the main reasons for this is the affordability of homes in Adelaide, with the median value of homes currently sitting at $648,000, making it an attractive option for those facing reduced borrowing capacities.
However, the story is different for Sydney, where only three suburbs made the top 50 with two of those making the top 10 suburbs with the greatest year-on-year increase in enquiry from investors.
One of these suburbs is Ultimo, an inner-city area that is set to benefit from returning international arrivals and rebounding numbers of student arrivals.
Investor enquiry in Ultimo more than doubled through 2022.
Meanwhile, inner-city rentals in Sydney are in short supply, with weekly rents continuing to rise.
However, home price growth in the inner city has underperformed relative to coastal and outer suburbs over the past three years.
This means that these regions present a relative discount in some cases, particularly in the apartment market.
Clovelly is another Sydney suburb that has seen a surge in investor enquiry.
This more affordable suburb in Sydney’s eastern suburbs region has seen some of the strongest rental price growth in the city over the past year.
New data from PropTrack revealed that Clovelly topped the list of the top 10 Sydney suburbs for growth in weekly house and unit rents, with investor enquiry more than doubling through 2022.
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Although Sydney's rental market was hard hit during the pandemic, rental demand has quickly returned as life has returned to normal and international borders reopened.
Conditions tightened fast for much of last year, and these tough conditions are ongoing.
Asking rents are expected to continue rising with strong rental demand and tight supply.
Interestingly, no Victorian suburbs made the top 100 suburbs where investor enquiry most increased through the calendar year 2022.
This indicates that while investors are diversifying their portfolios, they are not yet looking beyond certain regions, such as those outside of the major capital cities.
In 2022, the highest absolute level of investor enquiry was recorded in larger, high-density inner city suburbs and regional centres, as expected.
However, compared to 2021, there was a drop in investor enquiry in most of these areas, except for Brisbane City, Melbourne, Redbank Plains, and Adelaide.
Brisbane City experienced a remarkable 51% year-on-year increase in investor enquiry throughout 2022.
This can be attributed to the surge in home prices and strong rental price growth in the city since the pandemic began.
Additionally, rental properties in the city are in high demand, with quick turnover rates.
Despite the affordability advantage narrowing, Brisbane City remains more affordable compared to Sydney, Melbourne, and Canberra.
Moreover, the increase in net migration to Queensland since the pandemic began has further bolstered rental demand, leading to a surge in population growth.
Affordability has been impacted by rising interest rates and legislative changes that put pressure on landlords.
Nevertheless, with Australia in the midst of a rental crisis, and strong rental demand persisting despite the tight market conditions, what lies ahead?
Rental vacancy rates are at historic lows, and rents are on the rise.
As immigration rebounds, the demand for rental properties is likely to increase further.
New migrants and international students are more inclined to rent than buy when they first arrive in the country, especially in the major cities' inner and middle suburbs, such as Sydney and Melbourne.
The latest data from the Australian Bureau of Statistics revealed that the net inward migration for the September quarter of 2022 was the highest quarterly increase on record.
Additionally, the latest overseas arrivals and departures data indicate that strong inflows of new arrivals have continued into this year, with net permanent arrivals rebounding fast to pre-pandemic levels.
The rental market remains highly competitive, and declining property prices and rising rents have boosted rental yields from their COVID-19 lows.
However, changing legislation, reduced borrowing capacities, rising mortgage servicing costs, reduced capital growth prospects, and uncertainty around interest rates have made investors more cautious.
Investor loans are continuing to trend lower, with the number of new loans to investors dropping from the peak of activity in March 2022, with 21,663 new loans, to just 11,485 in January 2023, a decline of 47%.
However, this is still up by 27% from the 9034 loans granted to investors in May 2020.
Investor activity may begin to pick up once interest rates pause their climb, as expected later this year, and uncertainty reduces and confidence increases.
This will be good news for tenants as it may help ease the undersupply of rental properties exacerbated by the decline in investor activity.
However, it is unlikely to fully cover the significant increase in rental accommodation needed.
Tough rental market conditions may also encourage more people to enter homeownership sooner than planned, and together with increased investor activity, strong rent growth may offset the downward pressure from rate rises and help buffer price falls in some parts of the country.