Investors are about 70 percent of visitors at broker Andrew Ienna’s open houses in Sydney’s western suburbs as low borrowing costs lift returns on rentals, and high prices and down payments scare off first-time buyers.
The value of home-loan approvals for investors rose 4 percent in December from a year ago in seasonally adjusted terms, while mortgages for owner-occupiers fell 1.8 percent in the same period, government data show.
“The gap between rental payments and mortgage payments is tightening,” Ienna, director of Laing+Simmons’s franchise in Blacktown, some 35 kilometers (22 miles) west of Sydney’s city center, said in a telephone interview. “First-home buyers struggle to get a deposit together, so there’s going to be more of a rental crisis. That’s good for landlords.”
From Sydney’s inner suburbs to the mining towns of Western Australia, investors are taking advantage of the lowest mortgage costs since 2009 to profit from a national vacancy rate that has been below 2 percent for more than three years. The number of suburbs where it’s cheaper to buy a home on a variable rate mortgage than to rent rose to 494 in December from 388 two months earlier, figures from researcher RP Data show.
“It gets most tempting for investors when mortgage rates get below 5 percent,” said Matthew Hassan, Sydney-based senior economist at Westpac Banking Corp. “They’re getting close to that level, and if you couple that with vacancy rates around 2 percent, especially if we get some renewed gains in rents and a clear stabilization in prices, that’ll encourage more investors into the market.”
Australian banks lowered discounted variable rates by 105 basis points in the past year to 5.65 percent, the lowest since November 2009, according to the Reserve Bank of Australia. About 85 percent of the mortgages granted in December were variable, government data show. Three-year fixed mortgage rates plunged 85 basis points to an average 5.45 percent in the 12 months ended Feb. 28, according to RBA figures, the lowest level since the central bank began collecting data in 1990.
First-time buyers made up 14.9 percent of borrowers in December, the lowest level since 2004, down from 15.8 percent in November and 21.1 percent a year earlier, the figures show. The decline followed changes by state governments late last year in New South Wales, Queensland and South Australia replacing grants aimed at first-home buyers with those targeting only new homes.
“I’m seeing quite a bit of activity among investors taking out loans, and it’s obvious the banks are busy,” said Craig Betalli, a property finance consultant based south of Sydney with LJ Hooker Finance, a unit of real estate broker LJ Hooker Corp. Renters are “becoming concerned about value as interest rates have fallen.”
In the inner suburbs of Melbourne, few renters are looking to purchase as elevated prices freeze out first-time buyers, according to John Piccolo, chief executive officer of Woodards Real Estate, which operates 11 offices within 20 kilometers of the city center. Melbourne’s home and apartment prices declined an average 2.9 percent in 2012 and fell 0.4 percent in January, giving a median price of A$492,500 ($503,975), according to RP Data.
Most purchasers are investors, drawn by both rising rents and low vacancies and relatively higher returns compared with alternative investments including cash and bonds, he said. Melbourne’s vacancy rate, the highest in Australia at 3 percent according to SQM Research, is still almost a third of the U.S. rate of 8.7 percent, based on census bureau figures.
Australia’s national vacancy rate fell to 1.9 percent as of Jan. 31 from 2.3 percent in December, figures from SQM Research show. Excluding Decembers, when vacancies see seasonal spikes, the rate has remained at or below 2 percent since September 2009.
The increase in investor demand is a change from previous housing recoveries, which were led by first-home buyers, said Tim Lawless, residential research director at Brisbane-based RP Data. While first-time purchasers have stayed on the sidelines this time as government incentives fade amid historically high prices, they’ll return as rents continue to climb, he said.
“The market tends to naturally balance, so as rental costs get higher, we’ll see renters start looking at purchase options,” Lawless said in an interview in Sydney. “If we can’t afford to buy a detached house, let’s buy a unit. If we can’t afford to buy in the inner ring, let’s try the middle suburbs.”
A shift is beginning in some parts of the country, with the rate of rental growth slowing in 2012 compared with the previous three years, according to SQM Research Pty.
Rents increased 3.2 percent for houses and 2.6 percent for apartments across Australia’s capital cities in 2012, according to RP Data.
“Although landlords continue to wield control of the rental market, this control is waning,” according to SQM. “This is most likely attributed to the latest recovery in the housing market, prompting renters to exit the rental market in favor of purchasing property.”
Home prices across major cities rose 1.2 percent in January and 0.3 percent in February, following a 0.4 percent decline in 2012 and a 3.8 percent drop in 2012, according to RP Data.
In Sydney, the average house listed for sale took 50 days to sell and was discounted by an average 6.6 percent, according to RP Data figures for the week to March 10. Apartments in the city took 38 days to sell and at a 4.9 percent discount, the data showed.
Payments on a 30-year home loan with a 10 percent deposit and a 5.65 percent variable rate were lower in 494 suburbs out of a total 5,348 as of Dec. 31 when borrowers paid down both the principal and interest, according to RP Data. On interest-only loans, the number rose to 2,436 suburbs, compared with 1,975 in October, when the rate was 5.9 percent, RP Data said.
The report compared monthly mortgage costs and rents, and didn’t consider acquisition and property maintenance costs.
“With both dwelling values and mortgage interest rates now lower, the improvements to housing affordability have been substantial,” RP Data said in the report. “The combination of lower dwelling values and higher rental rates has pushed rental yields higher, improving the gross yield for property investors.”
RBA Governor Glenn Stevens is aiming to rebalance the two-speed economy, where mining regions in the north and west thrive while manufacturers, builders and retailers in the south and east struggle. The central bank last month reduced its economic growth and inflation forecasts as investment outside the mining industry remains elusive, the labor market softens and the high local currency contains prices.
In its quarterly statement released Feb. 8, the RBA predicted “below trend” 2013 growth of about 2.5 percent, compared with around 2.75 percent forecast in November. Consumer prices will rise 3 percent in the year to June 2013, compared with the 3.25 percent increase it had forecast three months earlier, the central bank said then.
A Feb. 7 report showed the unemployment rate held steady at 5.4 percent in January as hiring in resource-rich Queensland state offset a decline in jobs in the manufacturing hub of Victoria.
“During periods of higher unemployment or uncertainty, people get nervous and wait,” said John McGrath, chief executive officer of Sydney-based McGrath Estate Agents. “But you have to live somewhere, so you have to rent, so prices have come back, but rentals have gone up at the same time.”