The housing market is now two years into the growth cycle and showing signs of moving through peak growth. The value of diligent research and a carefully considered purchase decision is all the more important when values aren’t rising as fast.

Housing finance data released by the Australian Bureau of Statistics (ABS) last week showed the value of investment finance commitments was at a record high having increased by 2.3% over the month and by 29.8% year-on-year. Investors committed to $11 billion worth of housing finance over the month and accounted for 39.4% of all housing finance or 47.8% if you exclude refinances.

Whichever way you look at it the proportion of lending to investors is at a near record high, however the regulators and banking sector are becoming increasingly uncomfortable with the level of investment in the housing market. Residential housing still offers plenty of opportunities, but investors will have to work harder to secure a property with solid investment fundamentals compared with a year ago, particularly in the cities where capital gains have been significant and yields are low.

As mentioned above as a proportion of total lending, investor mortgage commitments were recorded at 39.4% in April 2014. If you remove refinances the proportion rises to 47.8%. Both figures are sitting at or very close to their highest levels since late 2003. Of course that was the tail-end of the large boom in home values from 2001 to early 2004. Given this, on an historic basis the level of investment activity is well above average levels


RP Data Property Pulse - research article


The second chart tracks the change in home values (on a 6 month annualised basis) against the proportion of total lending to investors. As you can see from the chart there is a history of investor activity continuing to escalate following the peak in value growth. In fact, across most recent growth phase’s investment lending has continued to rise following the peak in value growth. Over the current growth phase, 6 month annualised value growth peaked in November 2013 at 14.3%. At that time, investors accounted for 38.5% of all lending which has since risen to 39.4%.


RP Data Property Pulse - research article


If we look at the current growth phase we can see that growth in investment lending has outpaced growth in capital city home values. Since values reached their recent trough in May 2012, home values increased by 16.1% to April 2014 compared to a 59.2% rise in the value of investment lending. To put these results into perspective, in the post-GFC growth phase home values were 21.1% higher over the same period of time whereas investment lending was just 5.9% higher. At the beginning of the 2001-04 boom, values were 38.8% higher at the same point compared to a 207% rise in investment lending. So the escalation in investor activity currently is well short of the rise in 2001-04 but is much greater than in the post-GFC growth phase.


RP Data Property Pulse - research article


It isn’t just the fact that growth in values has seemingly peaked, there has also been a compression of gross rental yields. At the recent low point in values at May 2012, gross rental yields across the combined capital cities were recorded at 4.3% and they are currently recorded at 4.0%. When you calculate a net figure it is obviously much lower than this. Sydney and Melbourne are the two capital cities which are seeing the highest levels of investment activity. Gross rental yields are currently recorded at 4.0% in Sydney and 3.6% in Melbourne compared to 4.5% and 3.8% respectively in May 2012. Investment activity is also very much focussed on the inner city unit market and the level of approvals for units in both cities is currently at very high levels. Over the 12 months to April 2014 the number of units being approved in Sydney is at near record high levels and although Melbourne approvals have fallen recently they remain elevated and are 59% above the decade average. With a high volume of unit stock in the pipeline, much of which is investment grade, it will be interesting to see whether it all makes it to construction phase and what impact the large supply may have on values, rents and vacancy rates.

Based on the data presented it would seem that any investors entering into the housing market should be cautious. Capital growth has passed its peak and growth in investment activity has far outpaced growth in values. Furthermore, rental yields are stubbornly low in our two largest cities which are also the most popular with investors. Investors active in the market place need to consider what they want from their investment; short-term or long-term capital growth, rental returns or a combination of both. Unless they are investing for the long-term the best opportunities now probably lie outside of Sydney and Melbourne where value growth has to-date been lower and rental returns are higher.

Article by RP Data senior research analyst, Cameron Kusher