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Investor Frenzy Gathers Pace in December

Posted by RP Data on 2 March 2015

Last week the Australian Bureau of Statistics (ABS) released its housing and lending finance data for December 2014. The two series shed light on the level of activity by investors in the housing market at a national and state level, both of which show a continuing escalation in demand from this market segment.

Housing finance data for December 2014 showed that over the month there was a record high $12.6 billion in investor housing finance commitments, up 6.0 per cent from November 2014. The value of investor housing finance commitments was 18.8% higher in December 2014 than it was in December

2013. As a proportion of the total value of housing finance commitments, investors accounted for 41.0% of all commitments in December 2014 (including refinanced loans).  The first chart shows that the value of investor housing finance commitments is at an all-time high. The 41.0% proportion of total commitments is just shy of the record high of 41.2% in October 2003. To put the rise in investor activity into perspective, in December 2012, investors committed to $7.6 billion compared to $12.6 billion currently, a rise of 66% over the two years; the largest rise over a two year period since December 2003.

The investor housing finance commitments data reports commitments for purchases of new properties and those for existing. The second chart highlights that the overwhelming majority of investor housing finance commitments are for the purchase of existing homes. Of course, it should be remembered that the supply of new housing each month compared to the total housing stock is extremely small. In December 2014, there was $1.0 billion in commitments for new stock compared to $11.5 billion for existing stock. The $1.0 billion in commitments for new was the highest since it last reached $1.0 billion in December 2002. Year-on-year, the value of investor housing finance commitments has increased by 59.8% for newly constructed properties compared to 16.1% for established properties.
The lending finance data provides insight into investor housing finance commitments by state. Unlike the national data these results aren't seasonally adjusted.  

Looking at the value of housing finance commitments by state, all states recorded a greater value of commitments in December 2014 than they did in December 2013. Year-on-year, the increases were recorded at: 34.1% in New South Wales, 30.3% in Victoria, 8.6% in Queensland, 4.1% in South Australia, 4.5% in Western Australia, 8.3% in Tasmania, 10.6% in the Northern Territory and 43.0% in the Australian Capital Territory.

The third chart clearly highlights that the level of investment is largely focussed within New South Wales and to a lesser degree Victoria. These results are a proxy for the capital cities of these states (Sydney and Melbourne). These two capital cities have recorded the greatest increases in
home values over the past year and have also recorded the lowest rental yields. This seems to indicate that the majority of investment activity is premised on expectations of capital growth rather than rental return.

To further highlight the dominant investor activity in New South Wales and Victoria, the fourth chart shows the proportion of total national investor finance commitments are in New South Wales and Victoria. Although investor activity is escalating rapidly in New South Wales, as a proportion of all investor lending nationally it has been much greater.

In December 2014, 45.3% of all investor housing finance commitments were in NSW. Elsewhere, 26.8% were in Vic, 13.1% in Qld, 3.3% in SA, 8.8% in WA, 0.4% in Tas, 0.8% in NT and 1.4% in ACT.

The ramp-up in demand for mortgages from the investment segment of the market has been substantial over the past couple of years and has largely been focussed on Sydney and Melbourne. The falling rental yields and rising home values suggests most investors are firmly focussed on capital growth rather than rental returns at a time when interest rates are at record lows and may move even lower. While it has been a successful strategy over the past couple of years, investors should be cautious because the capital growth won't continue forever and they should give some consideration to the rental income from the property.


Author:RP Data

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