Investor lending tipped to grow

With rents rising at a time when property prices are falling, 2023 could bring new opportunities for investors, CoreLogic data has revealed.

The aggressive interest rate hikes of 2022 have weighed heavily on the housing market, with housing affordability decreasing, owner-occupiers and investors rethinking their purchase decisions.

As rates have risen to 3.1 per cent, the Australian Bureau of Statistics lending indicators for October 2022 found investor lending had dropped 17 per cent over the year, which was similar with owner-occupier lending, which fell 17.2 per cent over the same period.

The impacts of this lower investor participation can be seen throughout the current rental market, with rental appreciation hitting record highs and vacancy rates hitting record lows, CoreLogic analysis has found.

Nationally, gross rent yields rose 50 bps from 3.21 per cent in February to 3.71 per cent in November.

“With yields expected to continue to recover throughout 2023 and values expected to find a trough, prospective investors could be positioned to take advantage of both high rental income and capital gains,” CoreLogic’s economist, Kaytlin Ezzy, said.

“First home buyer decisions may also be triggered by ongoing pressure in the rental market in 2023, and the potential for housing prices to reach a trough over the year.”

However, earlier data from the Real Estate Institute of Australia (REIA) Housing Affordability Report had found that rental affordability declined less than housing affordability, in the September quarter, with the proportion of income required to meet median rent increasing by 0.1 percentage points to 23 per cent.

The Westpac-Melbourne Institute consumer sentiment report for December 2022 noted a “lift in confidence” among respondents with a mortgage, up 11 per cent across the ‘mortgage belt’, coming off ‘all-time lows’.

While still early days, Ms Ezzy said this could indicate that the initial fear of buying in a downturn is starting to stabilise, with some buyers hoping to take advantage of their position at the negotiating table.

“As we move into 2023, there continue to be a mix of headwinds and tailwinds for housing market performance,” she said.

“With expectations that the bulk of the rate tightening cycle occurred in 2022, housing value declines could find a floor.”

However, the extent of the floor in prices could be further weighed down by mortgage serviceability risks, she added.

“Strong rental markets and improving affordability from the point of falling prices may see a recovery in buyer activity in the second half of 2023, when the cash rate cycle stabilizes,” she said.

Rental crisis expected to worsen

However, head of research at InvestorKit, Arjun Paliwal, noted the large gap between rental demand and availability of properties in 2022 and expects the rental crisis to worsen.

Mr Paliwal expects rent prices to rise by at least 10 per cent in most Australian cities, with regional areas most affected.

Regional areas such as Barossa Valley, Adelaide, and Toowoomba, which have a vacancy rate of 0.4 per cent; Rockhampton (0.5 per cent vacancy); and Tasmania’s Burnie (0.1 per cent vacancy) could come under further pressure on rental markets.

On the flip side, record-low vacancy rates, an undersupply in houses for sale, relative affordability, and strong local economies in regional Australia will lead to property prices being pushed up in these areas.

“Some standout regions he predicts will see strong capital growth in 2023 include Townsville, Toowoomba, Rockhampton, Bundaberg, Albury-Wodonga, and the Barossa Valley,” Mr Paliwal said.

“In Bundaberg, the median house price has increased significantly by 5.5 per cent over the quarter to September and sales asking prices have also increased 3.1 per cent between September and November, alone.”

Meanwhile, across the country house prices are estimated to have fallen around 7 per cent across the country in 2022, with further falls upwards of 10 per cent in 2023 tipped by economists.

The fall in property prices alongside government incentives could be welcome news for first home buyers once more.

For example, the NSW government’s stamp duty reform will come into effect from 16 January, giving first home buyers the option to pay an annual land tax on their property instead of an upfront stamp duty for homes valued at up to $1.5 million.

Mr Paliwal said this will lead to more first home buyers entering the market, as a one-off stamp duty cost has long been a barrier preventing them from purchasing sooner.

Related: 2022: A year 'unlike any other' in property]

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Last Updated: 02 January 2023

Published: 03 January 2023