We all know as the property cycle moves on, and the economy improves, the Reserve Bank of Australia will once again raise interest rates.
And when this occurs the property market will slow down, or slump, or worse (depending upon how it is), as it has always done in the past.
Just think back to 2010 when interest rates rose and the property market stopped dead in its tracks.
Or 2003 when the same thing happened. Or in the 1990s.
Of course things may slow down even sooner if the RBA introduces macro prudential controls as it has been talking about recently.
However when interest rates do rise, there will probably increase by around 2%.
How will you cope with this?
Can your budget handle this?
Well if you’re like the typical property investor in Australia you’re likely to be O.K.
According to the RBA, investors are “fairly well placed to service their debt” and “typically (used) less than 30 per cent of their income to service their total property debt.”
Interestingly more than half are ahead on their mortgage repayments and seventy per cent of property investors are 40 or over, which is important because the unemployment rate for this age group is very low.
In fact the RBA data shows that investors are typically cashed up, know what they doing, and present little risk to the financial system or the economy generally.
The SMH wrote an insightful article explaining that…
Wealthy property investors are ‘well placed’ to survive the property downturn
Here’s what they had to say:
Most housing investor debt is owed by high-income households with the ability to service their payments when property price growth moderates, the Reserve Bank says.
Despite concern that the household debt-to-income ratio is moving beyond its already high level of 150 per cent, a breakdown of investors shows a more nuanced picture.
The Reserve Bank analysed the types of households and the ages of the growing crop of housing investors and found it was the highest-income households that owed most (60 per cent) of the total investor housing debt.
These investors were “fairly well placed to service their debt” and “typically (used) less than 30 per cent of their income to service their total property debt”, the central bank found in its biannual Financial Stability Review, released on Wednesday.
RP Data senior analyst Cameron Kusher said it was typically higher-net worth individuals who chose to invest.
“This group is in a better position to cope in the event of a downturn.”
In the report, the Reserve Bank said it had found no signs of reckless lending but it was actively examining the use of credit controls in an attempt to calm the market.
The central bank warned that “the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock”.
The warnings are effectively aimed at investors with lower incomes, or ready access to liquid assets, who have rushed into the hot inner-city Melbourne and Sydney markets without considering the impact of slower price growth.
One in 10 Australians aged over 15 is now a property investor and those investors are increasingly using negative gearing.
Older Australians are rushing to invest in property, with a jump in the number of investors who are aged 60-plus.
“This older group now makes up one in five property investors.
The increase in property investment has come as investors seek assets with higher returns and with the Reserve Bank keeping it’s cash rate a record low of 2.5 per cent for 14 consecutive months.
“The (Reserve Bank’s) concern is you’re seeing a lot of investors in the market treating property like a short-term asset,” Mr Kusher said.
“It’s a non-liquid asset, and the concern is what happens once the price growth isn’t there or equity market picks up?
” Interest rates are low, so if you keep your money in the bank you’re not making a return.
“At the moment, when you look at 16 per cent growth in Sydney property prices and 11.5 per cent in Melbourne, it’s hard to find anything to compete with that.”
The property boom has been focused in Sydney and Melbourne.
“If you have a look at where more of the investor activity is happening, it is inner-city apartments, units and townhouses in Melbourne and Sydney,” Mr Kusher said.
“You’re creating more risk in that geographic area rather than spreading that risk throughout the country.”[sam id=51 codes=’true’]
The Reserve Bank highlights the concentration of construction and lending activity in Sydney and Melbourne and notes the Melbourne apartment market at risk of “localised oversupply“.
The Domain Group senior economist Andrew Wilson echoed this point:
“That Melbourne high-rise CBD [central business district] market certainly looks like it is saturated.
“Melbourne doesn’t have the magnetism of inner-city living as, for example, Sydney does.”
Overall, the central bank found the supply of housing was still catching up to demand, with vacancy rates remaining low.
The report found a drop in highly-leveraged lending but many investors were still opting for interest-only loans.
“What that rise in the number of interest-only loans highlights is that there is a lot of investor activity in the market and if house price or the market turns, you might find a lot of people looking to exit the market at the same time,” Mr Kusher said.
No matter what happens with lending controls, what lies ahead for property investors is uncertain.
The central bank’s use of it’s most-effective house price lever, interest rates, is limited by a sluggish wider economy.
Mr Kusher said: “Mainly, the central bank’s concern is the great unknown – what happens once the growth isn’t there or the equity market picks up?”
Dr Wilson added: “We are in unchartered waters in terms of the investment market. Every cycle is different.
“The (Reserve Bank) is signalling its concerns so there will be orderly disengagement from the market – without regulatory incursion.”
Read more: Sydney Morning Herald
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