Over the past few years, as house prices in our major capital cities have continued to climb due to increased demand, mum and dad investors have been consistently demonised for their role in creating a so-called housing bubble.
Even in the current climate, where most analysts are saying the overheated housing sector has died down to more of a slow, controlled burn than the raging inferno it was, the average Aussie looking to shore up their retirement fund with real estate is in the firing line once again.
Same, but different?
This time around, experts are comparing the local property market to conditions that brought some of its comparable, overseas counterparts to the brink of serious collapse.
The source of this current housing crash speculation, and subsequent vilification of mum and dad investors, just happens to be a large hedge funds manager. Not sure if that’s coincidental…
Watermark Funds Management recently warned that we are experiencing similar patterns in house prices as countries where significant market crashes occurred post GFC, including the US, the UK, Spain and the Netherlands.
The investment firm is pointing the finger at Perth and Darwin as evidence of the issue around mum and dad investors particularly, with property values in both cities declining alongside the number of investors who’ve jumped ship from these ailing markets.
One of the big concerns raised by Watermark is the proportion of new mortgages acquired by “amateur” property investors, which stands at 35 per cent here in Australia; around three times higher than the US, UK and Canada.
In Sydney, 42 per cent of activity in the local market is attributed to non-professional property punters, down from half of all new mortgages in 2015/16.
Do they know what they’re doing?
It’s not necessarily the fact that these average Australians preparing for their impending retirement with residential housing assets are evildoers.
Moreover, it’s the basis on which many are selecting and purchasing properties that has market watchers worried.
A survey conducted by ME Bank in November revealed that over half of all investors active in the markets are using past performance alone, as a guide for future success.
When asked the primary reason for their love affair with bricks and mortar, 56 per cent said, “Australian house prices have always gone up in the past.”
More concerning however, was the 11 per cent of respondents who stated, “so many other people are buying investment properties it must be safe,” while only 34 per cent were confident in their buying decision due to “advice or analysis”.
Certainly, it’s impossible to deny that house prices have always risen in Australia. Officially calling an end to the house price boom early last month, UBS analysts noted a staggering 6556 per cent growth in this asset class over the past 55 years.
But ME Bank head of home loans Patrick Nolan, cautions that investors shouldn’t take past performance alone as the sole barometer for future success, “particularly with property prices so high.”
“Analysis and advice is the best basis for making any investment decisions, particularly if you’re tempted to rely on past performance, or indeed if you are basing your decision on what other investors are doing.”
Nolan rightly points out that our markets are rather diverse, meaning not all properties will perform equally at any given time.
“While Perth is currently recovering from a downturn, Melbourne and Sydney are growing albeit not as fast, while growth in Hobart has improved.
“Apartment development in Brisbane, Sydney and Melbourne are also at record high levels, with some commentators speculating supply may outstrip demand in the short-term,” said Nolan.
So what is likely to tip the scales on mum and dad investors to potentially bring this house of cards crashing down around novice landlords?
Aside from the obvious crackdown on investor lending by banking regulators, Watermark says if a Labor government came into power nationally, it may curb tax breaks like negative gearing, causing more mum and dad investors to jump ship, due to decreased cashflow and increased holding costs.
“This is a concern to the extent that recent macro-prudential measures and possible future tax changes are being specifically designed to reduce investor activity in the Australian housing market,” the Watermark report states.
According to the investment firm, excessive property investor activity was one of the catalysts for house price volatility in the US, just prior to and immediately post-GFC.
Over there, so-called “investor” cities had over 50 per cent appreciation during the housing boom and then a 50 per cent larger correction in the wake of the subsequent market decline.
“The US experience in the ‘00s suggests that housing markets with high participation of leveraged speculators tend to exhibit increased volatility in both booms and busts,” the report said.
Author of the report Hamish Chalmers, said if Aussie mum and dad investors suddenly make a mad, collective dash for the exits, we face the same possibility of a sharp decline in house prices.
“Our research highlighted that the Australian economy is exhibiting many similar symptoms that those other economies did before they had their housing-led busts, so things are definitely slowing,” said Chalmers.
“What happens next is dependent, and how bad things will be depends on the reaction from the Government and regulators.
“It depends on the actions of the banks themselves and I think crucially, and where Australia is different, is that there is a huge army of amateur investors.”
Of course our situation is arguably different in many other ways if you want to compare apples and oranges.
For one, our banking sector is much more heavily regulated than the pre-GFC financial services sector in America. And we traditionally have a higher rate of home ownership, providing underlying stability for the housing markets, even though this has decreased slightly in recent times.
Furthermore, overseas participation in our property markets is continuing at a substantial rate, as Chinese buyers help to underpin the new apartment sector and absorb the vast amount of stock quickly coming on line, which many were concerned would cause a supply over-saturation.
At the end of the day…
Property is one of those sectors that always causes a good deal of conjecture around future economic stability, as it is such a steadfast fixture of our nation’s ‘wealth ideal’. Where the current climate will lead us however, is really anyone’s guess.
The take home message for investors is do your homework. Purchasing property investments based on what everyone else is doing, or the simple fact that prices have always gone up in the past isn’t really cutting it. If you want to stay in the game and ride out the ups and downs that are par for the course with residential property, seek professional advice and do some serious number crunching.
No one can predict the future, but you can be better prepared with the right foundations for your investment portfolio.