Implementing macro-prudential tools to slow the level of property investment in the heated housing market may not work, according to a property market research analyst.
Cameron Kusher, research analyst at RP Data, said macro-prudential tools might not be enough to deter property investors when interest rates are so low.
“The Reserve Bank has flagged that along with other regulators such as APRA, they are looking to introduce macro prudential tools to slow the level of investment lending taking place. Even if the tools are implemented in such a way to make investment borrowing somewhat less attractive, the far superior total returns from residential property compared to interest on savings may continue to attract the interest of investors,” he said.
“Quite simply, if the goal is to slow residential property investment, macro-prudential tools will need to work in such a way to make residential property far less attractive to invest or alternatively, investors need a viable and attractive alternative to property investment.”
Recent data released by the Australian Bureau of Statistics shows that lending for investment purposes hit a new high in September at $11.9 billion in finance commitments to investors over the month. Investors now account for 41.4% of total housing finance commitments and 50.3% when refinances are removed – both of which are at record highs.
Looking at housing finance loans to investors against standard variable mortgage rates, Kusher noted that both the current and previous spike in investor lending coincided with a period of low mortgage rates.
“Of course low mortgage rates occur in concert with low interest rates which mean cash savings get low returns, as a result investors push into other markets such as residential housing.
“Investors in housing essentially have two options for generating a return from their investment; capital growth or rental return.”
According to RP Data, combined capital city home values increased by 8.9% over the 12 months to October and total returns have been recorded at a higher 13.3%. However, capital growth and total returns have been easing since their peak in April this year. Despite this, Kusher says residential property still remains the safest bet for investors.
“The Reserve Bank has repeatedly noted that interest rates are likely to remain on hold at 2.5 per cent for some time yet. With such a low interest rate setting, investors are finding little value in keeping their money in the bank,” he said.
“Although the rate of growth is slowing, growth remains and until growth slows sufficiently and total returns also diminish it is difficult to see how residential property won’t remain attractive to investors.”