Homebuyers may be excused for assuming that, by the age-old adage “buy low, sell high,” investors would pour into the housing market during a slump.
But this puzzle lacks one component despite decreased property costs and other variables that make brick-and-mortar attractive to landlords, such as low vacancy rates and growing rents.
This is a result of rising interest rates, according to analysts. Recent increases are the primary reason for investors’ inactivity, resulting in higher mortgage repayments and increased uncertainty.
Higher mortgage rates have effectively discouraged investors from joining the market, even though it is less expensive to acquire an investment property, more accessible to locate a renter, and more straightforward to obtain decent rentals.
According to the most recent data from the ABS, investor lending is down 15.3% year-over-year through September.
Thomas McGlynn, chief executive officer of BresicWhitney, stated, “Investors are still extremely apprehensive about entering the market since there is no clear runway for where interest rates will fall.”
“Once you know what your mortgage repayments will be, it is a very healthy market to purchase in as an investment. The final piece of the jigsaw makes the market appealing for entry.”
After interest rates peak and stabilize in the next six to twelve months, McGlynn predicts this will alter, adding that investors are actively scrutinizing houses.
“You have low vacancy rates and growing rents, so your return is greater, and the price at which you can purchase the asset is lower,” he added. “The final component is the predictability of what you’re paying.”
In most major cities, this excellent recipe for investors has come at the price of tenants. As a result, residents have limited housing options and suffer rent hikes that exceed inflation. Due to the intense competition, many are offering above-market rents to lease a home.
Dr. Diaswati Mardasmo, the chief economist of PRD Real Estate, stated that while investors may lock in higher rates for a standard one-year lease, there is no assurance that their expenses would be reimbursed over that period due to inflation.
“The reason investors are not participating is that you only receive a fixed income for 12 months, but your outgoing costs can increase at any time; it can be from the cash rate, it can be from council rates, it can be from corporate body bills, and it can be from water bills,” Mardiasmo said, adding that negative gearing would not alleviate the problem.
Your mortgage payment will increase regardless of whether or not you settle your negative gearing at tax time.
Nerida Conisbee, the chief economist at Ray White, attributed the decline in lending to increased mortgage rates and a drop in buyer confidence.
Conisbee explained, “It’s just psychology; they don’t want to get caught in a declining market, they don’t know how long it will be until prices recover again, and it’s more costly to borrow.”
The sales manager of Nelson Alexander Fitzroy, Roland Patterson, stated that several investors were already touring open houses to evaluate value.
“It is quite difficult to anticipate the bottom of the cycle, but they may buy now and receive a 10% discount off the market’s top,” he added.
“This is still a considerable saving. With a rise in rental returns, interest rates might be countered.”
