Savvy property investors are likely to re-enter the market in 2023 after a year in which many quit because of fast-rising interest rates and high prices, experts predict.
With the majority of cash rate hikes now likely behind us, as well as declining prices, high rents, tight vacancy rates and the return of migration, the market will have all the right essentials to attract investors.
“Maybe we won't see them in as high numbers as in the past just yet,” said Domain chief of research and economics Dr Nicola Powell. “But I do think the strategic investor who isn't fearful of purchasing in a downturn and has an eye on the fundamentals of the housing market and an understanding of the dynamics will be back.
“Declining property prices and rising rents have meant growing rental yields and astute investors will be looking for that cash flow, especially with most interest rate rises behind us. There are still very competitive conditions for tenants and with the government encouraging migration, and overseas students coming who'll rent, it's likely to be a good prospect for them.”
Any rise in the number of property investors would come on the heels of major drops in investment in the residential market.
On the latest Australian Bureau of Statistics (ABS) figures, new loans to investors in November 2022 fell to $8.29 billion, down 3.6 per cent from the previous month, and 23.2 per cent lower than 12 months before.
Drilling down into the actual number of new loans by investors, that decrease was even more accentuated, says Nicola McDougall, the chair of Property Investment Professionals of Australia (PIPA). The number was down from the peak of activity in March 2022 with 21,663 new loans to 16,251 in November, a plunge of 25 per cent.
“Investor activity fell off the cliff, to be honest, since all the rate rises started,” McDougall said.
But at the same time, property values are still falling, down nationally by 8.4 per cent since their peak in May, on research from CoreLogic.
Rents are still rising, however, and the latest Domain Rent Report shows rents are reaching record highs in every capital city except Darwin.
Gross rental yields are rising as a result. Sydney's median unit rental yield is 4.11 per cent, or 23.2 per cent more than a year ago, on Domain figures. Melbourne's median unit rental yield is now 4.51 per cent, up 18.4 per cent over a year. Unit yields are now north of 5 per cent in Brisbane, Adelaide and Canberra, and above 6 per cent in Perth.
There are few rental properties available, and the rental vacancy rate was just 1.4 per cent in Sydney and the same in Melbourne in December, and below 1 per cent in Brisbane and Perth, on Domain data, suggesting yields are likely to continue their ascent.
“Most commentators say we're fairly close to the end of the rising interest rate cycle, so we'll see a rise in the number of investors as they realise there's a lot of opportunities out there for them at the moment,” said McDougall. “The savvy, educated investor will be getting back into the market ... sooner rather than later.
“But the problem for many is that it's hard for them to secure enough finance to buy. With a loan serviceability buffer rate of 3 per cent in place, it makes it tough for those with two or three properties to finance another without selling an existing one, which most don't want to do.”
Ray White chief economist Nerida Conisbee believes the peak of interest rates will happen early in 2023 which, together with the prospect of population growth and the continuing housing shortage, will create excellent conditions for investors.
“We still have one or two interest rate increases to come but, once they cap out, we'll see price growth start again which will bring investors back to the market,” she said. “Everyone knows they should invest during a falling market but, in practice, most wait till prices start rising again.
“We tend to weather recessions better than the rest of the world, and we have strong employment and growth, as well as a rising population and a shortage of homes. So, we see good opportunities for investors in 2023.”
***Source: Sue Williams - Domain