Real Estate

Trouble in paradise for Australia's property speculators

Beachfront houses on the Gold Coast, Australia.
Getty Images - Chris Hyde

One of the key factors powering Australia's stellar home price boom is set to slow dramatically, economists warn—a change that could finally see the country's seemingly endless run of property price appreciation take a well-needed pause.

Speculative investors are a major force in Australia's red-hot property market, helping push the value of residential property half a trillion dollars higher in the past year. In fact, more than half of new home loan approvals are for investment purposes, according to Reuters.

But that could soon change.

"While momentum in the housing market continues to take effect, we expect that going forward, record low rental yields accompanied by [new] macro prudential policies targeted at investor lending are likely to provide a test for housing demand, particularly from investors," Goldman Sachs said in a Monday report. That could see home prices increase at a more moderate pace, the bank added.

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The Reserve Bank of Australia (RBA) has repeatedly voiced its concern over speculation in property markets in recent months, fearing that a sudden withdrawal by speculators could trigger a sharp housing correction, which in turn could hurt the broader economy, particularly given that 60 percent of household wealth is tied up in property assets. But despite rising home prices, the central bank isn't expected to take any action at Tuesday's policy review.

Like Goldman, Shane Oliver, head of investment strategy and chief economist at AMP Capital, believes lower investor demand could dampen home price growth going forward. He added, however, that an unlikely scenario in which the RBA rapidly increased interest rates well above the current 2 percent level would be the only event to trigger home price declines.

Breaking down the data

Analysis by CoreLogic RPData on Monday showed rental growth across Australia's capital cities edging up an annual 0.9 percent in July, the slowest pace on record. That pushed gross rental yields to new lows even as July house prices surged 11.1 percent on year, the highest since April 2014.

"When you consider that Sydney rents have increased by just 2.5 percent over the past twelve months while values have climbed 18.4 percent, it is easy to see how yields are getting squashed," explained Tim Lawless, CoreLogic RP Data's head of research, in a statement on Monday.

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In Melbourne, one of the cities with the highest amount of investor activity, yields are around 3 percent - the lowest among Australia's capital cities. Dwelling values meanwhile rose an annual 11.5 percent in July. This suggests that that low yields alone haven't been enough to discourage investment, according to Lawless.

But combined with new crackdown on lending practices, the outlook for investor interest is dimming.

In late July the Australian Prudential Regulation Authority (APRA) introduced fresh capital rules for banks' mortgage portfolios, including a 2 percent increase in capital to be held against the loans and an increase in risk weighting on home loans from 16 to 25 percent. The new measures came after June data showed the majority of banks exceeded APRA's 10 percent ceiling on annual investment home loan growth.

In response to APRA, financial institutions including Westpac, ANZ and AMP have announced tightening measures in the past week, such as curtailing loans to foreign investors, introducing higher interest rates for investor loans, and even halting investor home lending.

Lawless also expects the recent spate of developments to be a major obstacle for investor interest.

"The combined effect of tighter lending parameters, potentially higher mortgage rates for investment loans as well as limitations on the pace of investment lending imposed on Australia's banks should conspire to slow investor demand in the market."

"Add to this the growing concern about the Sydney and Melbourne housing markets being overheated and the record low rental yields and the outlook being painted for investment is likely to be one of diminishing demand," he added