Australia’s first buyers squeezed out of property market by investors


For a moment, Australia’s housing market was focused on young people. People were entering their first house. First-time homebuyers were on the rise and it was a glorious and hopeful time. A time when dreams came true.

That time is over. Show up at an auction and a 51-year-old man will step out of his Porsche and bid against you, until you are forced out of the auction and he adds a twelfth house to his portfolio. that is, Australia has returned to normal, as shown in the following graph.

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That’s right, as the graph illustrates, we’re back in a world where investors borrow a larger share of new home loans than first-time homeowners.

This is customary for Australia – it was only for a short time there, at the end of 2020, that investors got nervous enough to disappear for a moment, and the way was cleared for young families to finally buy. their own home. (We saw a similar brief exchange during the 2008-09 global financial crisis.

What does it mean?

Housing prices have increased at an extremely rapid rate. The average price of a home in Sydney has risen 13.5% over the past 12 months, according to CoreLogic. This is an incredibly fast rate of growth – if prices were to rise this steadily so quickly, prices would double every 5.5 years!

The return of investors to the market is both a cause and an effect of rising house prices. Investors want capital appreciation – they would like their investment to double every 5.5 years! They are therefore attracted to markets with rising prices.

The more investors there are in the market, the more bidders there are at each home auction, the more people are willing to spend money and the more homes sell.

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I feel bad for the first-time buyers who are squeezed out, but I don’t want to stack too much on the real estate investors.

Obviously, they don’t take homes off the road (except in the rare case of leaving an apartment vacant, a phenomenon that people love to talk about but rarely see in reality.)

Anyone who rents in the private market depends on a real estate investor somewhere. Rental housing is a vital product of the Australian economy on which almost all of us depend at some point in our lives. Yes, some landlords are heartless and rent moldy homes, but some are patient and don’t even raise rents every year.

By the way, rents are much lower than real estate prices. Rents in the capital are up 3.3 percent and rents in regional areas are up 9.3 percent. In that sense, it’s not such a bad time to rent – in relative terms, it’s getting cheaper!

Why is real estate investing so popular in Australia?

One answer is a negative gear. If you have an investment property and spend more money on it than the rent you receive (i.e. mortgages, rates, insurance, repairs, and maintenance are less than rent ), this loss counts as a tax deduction. This is called “negative leverage” and is a popular investment approach.

Of course, you haven’t finished early at this point. You cannot earn more of a tax deduction than you lose by managing the property. You still need to make a gain on the value of the home for it to actually work as an investment.

Fortunately, there is another tax break for investors: the capital gains tax rebate. When they sell the property, they only have to pay tax on half of the profits (assuming the property has been owned for more than a year).

Laws can change. But these laws? The Labor Party adopted a few policies in the last election – abolishing negative debt on established properties and reducing the capital gains tax cut.

They were whipped in this election and abandoned these policies. You can pretty much guarantee that no party will have the courage to try to change these rules again for a while. The rules for capital goods are probably quite secure.

Where is the hottest investor frenzy?

As the following chart shows, investors spend the most in New South Wales, where they borrowed almost twice as much as first-time buyers in May. The only regions of the country where the pattern is reversed are WA and NT.

Early buyers are struggling to keep up. The average loan size for a first-time buyer is now $ 465,000, up from $ 355,000 in 2017. How much does the loan size have to be to beat all real estate investors?

With interest rates at record highs, loans are easy to repay, but the risk for the young first-time buyer is that rising rates in a few years will make that loan difficult to pay off. And unlike a real estate investor, you don’t have to pay rent to help pay it.

Young Australians seem ready to be forced to rent until something major changes.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.

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