“Owning multiple properties is unethical.” A client of ours shared her friend’s opinion towards property investors with me the other day.
This makes me realise that there are still people around believing that houses are there only for owner-occupation, and property investors are the “bad guys” who cause Australian housing market’s affordability constraints in some cities, especially when the national house prices have risen 20%+ a year in 2021.
As a property investor myself and an investors’ buyers agent, I genuinely understand there is some bias, however, I feel it’s time to clean the name of a property investor.
In this blog, we’re going to find out the true cause of housing affordability issues and discuss why property investment benefits not just the investors, but everyone.
Unaffordable housing is not solely caused by property investors.
If it was, then a city must be less affordable if it has more investment properties.
However, the reality is not like that. The Demographia International Housing Affordability Report (2021 Edition) uses the “median multiple” (median house price to median household income ratio) to rate housing affordability in cities of 8 countries including Australia. The higher the multiple, the lower affordability level a city has. The multiples of 4 Australian capital cities and 4 international cities are shown in the below table. We have also listed the percentage of households who live in a rented property, shown in the last column.
Brisbane has a higher rented home proportion than Sydney andMelbourne yet it’s more affordable (lower median multiple); Seattle has the highest rented home proportion while it’s one of the least unaffordable cities among the 8.
Inspired by the Demographia report, we have calculated the median multiple for some largely considered affordable Australian cities, listed in below table. Looking at their rented home proportion, you’ll notice that even with relatively low prices, they all have considerable amounts of investment properties in the market, even more than the major cities, percentage wise.
*Note: Due to the difference in housing price and income data, the median multiple in our calculation is around 13% lower than the Demographia figures, thus there is an adjusted figure which is 13% higher for reference.
If not investors/investment properties, what caused the surge in prices?
Moves of housing price is primarily driven by demand and supply. It is the increasing demand and low supply level that have caused the rise in Australia’s housing prices and eventually led to poor affordability.
· Increasing demand
a. The RBA cash rate has been going down since 2008, reaching its lowest point last year. The low interest rates have led to lower repayments and increased borrowing capacity of home buyers due to lower assessment rates.
It’s important to note that increasing demand and housing booms are not always caused by low/lowering interest rates. For example, the RBA cash rates were around 5-6% during the 1996-2004 housing boom (below chart). A growing population, increasing money supply (credit availability), reduced housing supply, improving confidence/sentiment and surging economies all play a significant role together.
b. Australian population has been growing strongly since the mid-2000s, with a higher growth rate than both the world and the high-income countries average. The population growth has increased the underlying demand for housing across Australia.
c. Economic growth and the household wealth growth.Australian economy has been growing well in the past decades, at a pace higher than the high-income countries average. The economy growth has led to a low unemployment rate level and an increase in households’ net wealth entering the 21st century, increasing Australian’s confidence in property purchase.
d. Other factors that contribute to the high housing demand include the governments / banks / regulatory bodies input or lack of inputs.
The Demand driving support
– First home buyer and building schemes
– Government guarantees
– Tax concessions
– Stimulus packages
– Infrastructure improvement
– Higher loan to value ratios
The Supply constraining activities
– Planning system and land release blockages which will reduce the supply to meet market demand from all buyer groups.
– Complicated rules, additional regulations and unnecessary/over the top taxes that sting investors and reduce their desire to keep stock moving (sale/buy). Outcomes of this are longer hold times and a reduced desire to sell (stock blockages).
– Lack of leadership with a clear vision for longer term / bigger thinking. Australia’s population is extremely concentrated, leadership has the power (pending a long-term plan + stability in government) to create a greater spread of the Australian population, giving access to greater innovation for housing solutions, release of supply and less competition in selected cities.
Australia’s Housing supply position
New supply level was not increasing at a commensurate pace. In the past 10 years to 2021, Australian population has grown by 15.2% (with around 60% of the added population being overseas migrants), but the total number of residential listings has declined by around 1/3. The significant difference between the two is indicating insufficient supply of Australia’s housing market.
Instead of causing affordability issues, property investment contributes to rental affordability.
A healthy number of rental properties in the market can balance vacancy rates and rental price growth. Data demonstrates that when investor activities decrease, rent levels tend to go up.
Investor activities can be indicated by their loan commitment value. ABS data shows that the ratio of investor loan value to owner occupier loan value has been largely going down since 2015, before recently increasing. The subdued investor activities have led to a decline in rental vacancy rate since 2016, and in the meantime, the national rent level has been going up in response to the lowering vacancy rate.
As investor activities are picking up strongly since last year, vacancy rates are likely to bounce back up in certain locations, and consequently slow down the rental growth rate. However, we don’t expect anything widespread like this to occur for multiple years due to how far behind we are with active investor participation and rental supply from previous years.
Property investment is essential.
Now that we have addressed the affordability debate and how property investors should not have the finger pointed at them, let’s look at property investment itself: why it is necessary and not unethical?
· Property investment meets market demands.
There are always demands for rental properties:
– The largest renter group is young adults before buying their first home. A Money.co.uk study shows that at the end of 2020, the average age of first home buyers in Australia is 36. It seems that most of the population in their 20s and early 30s tend to be renting, and this age group (20-34) takes up 21% of the total population.
– There are also fly-in-fly-outworkers who don’t want/need a permanent residence in their working city. They would rather rent for a few months/years than going through the troublesome buying and selling process.
– There are an increasing number of renters by choice (flexibility, lifestyle preference, etc). These renters wish to rent where they desire to live (prestige locations) instead of buying where they can currently afford.
– There are also people who rent due to individual circumstances, such as relationship separation, job security concerns, try-before-you-buy, and more.
Investors and rental properties meet the demands of these groups. Without rental properties, these groups will have no choice but to buy against their will or financial situation, which would damage and limit their life quality.
· On the other hand, property investment isa great way to secure retirement life.
You might have noticed that age pension is not enough for us to have a comfortable lifestyle come retirement.
Currently the normal pension rate is $976.5/fortnight ($25k p.a.) for singles and $1458.6/fortnight ($38k p.a.) for couples. If one was to solely rely their life on the pension, their life quality would be extremely limited.
The Australian Government Treasury states that “Age Pension, combined with other support provided to retirees, is effective in ensuring mostAustralians achieve a minimum standard of living in retirement.”
And this “minimum standard” could be even lowered as theAustralian population is ageing. According to an Australian Institute of Health and Welfare report, approximately 16% of Australia’s population were aged 65and over as at 30th June 2020. The percentage is set to increase to circa 20.7%in 2066. The growing aged population will be putting increasing pressure on the age pension system.
Some of you may believe that the Age Pension rate would be growing to a higher level as the system matures. Now let’s check how the rate has grown in the last 20 years. In 2001, the maximum basic rate for singles was$10,049 p.a. which is equivalent to $16,078 p.a. today factoring in inflation. Today the maximum rate is $22,937 p.a., having grown 42.6% in 20 years. If growing at the same rate, the maximum rate in 2042 would be $32,720 p.a. at today’s currency. Is that any significant improvement or even barely enough to fund a comfortable living with the costs of goods/services increasing?
Seriously, would anyone want to rely on this pension system that provides just a “minimum standard” of living? Who would want to put their future in the government’s hand instead of their own?
That is why people choose investments to grow their wealth in preparation of retirement, and property is one of the options. It is favoured by many investors for the below reasons.
– Constant return on investment: Property generates rental income regularly. The rents help reduce mortgage repayment pressure and become part of your income once the mortgage is paid off.
– Security: Property is much less volatile as an investment asset class in Australia compared to others.This gives many investors a sense of security.
– Growth: If buying in a location with great growing momentum, your property can enjoy a steady and healthy growth rate for years, easily beating inflation, and increasing your asset value.
– Tax benefits: There are various tax benefits for property investment.
So if you are a property investor or thinking of investing in property, you should be proud of yourself working proactively to create a better life for you and your family’s future. Alongside this you are supporting the country in finding a balance on rent prices through your participation whilst also supporting the many varying groups/life phases-stages that intentionally seek rental accommodation to support their life’s desires and needs.
When people think of property investors, they immediately assume that every investor holds 10+ properties. It simply isn’t the case, the largest group of investors are those that own 1 investment property (71%) or 2 (19%). I would much rather have them support all of the above, instead of seeing everyone sit back and rely on the government to do the heavy lifting that investors do for the country. At the end of the day If you don’t own real estate I ask you to reflect on this point.
Imagine you now do, others seek greater affordability of investments, its agreed to and your home value plunges $200k, your loan is higher than ever or more than your property balance. As an asset this will only ever be shelter for you, you will be left paying the mortgage for close to forever and not get anywhere due to this new and amazing greater affordability, you now must live on the minimum pension or try your hand at other investments as property investors are the bad people and you don’t want to invest, flexibility for many (renters) is now lost and rents start rising all acrossAustralia making it much harder for everyone to save enough to join you on these “great new affordable homes”. The government doesn’t step up to support greater housing choices, homelessness increases, and you’re constantly stressed about your finances as you grow in age but not in wealth. It doesn’t sound too rosy and with this in mind I hope you can see why there are many varying opinions about this topic. Of course the above scenario can be chopped and changed in many ways, or greater innovation can perhaps come in to the picture. However, we are simply reviewing it with the cards we are dealt today in life in Australia, the above is a grim reality on what the other side looks like. I am not saying the current investment picture is perfect, it’s far from it, however, investors are important based on what is occurring today in Australia and balance needs to be found.
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