Housing is the single biggest asset class in Australia, worth an estimated $6.5 trillion across 9.6 million dwellings. CoreLogic RP Data released its national Profile of the Australian Residential Property Investor and we catch up with Cameron Kusher as he picks out the highlights.
Kevin: Housing is the single biggest asset class in Australia, worth an estimated $6.5 trillion across 9.6 million dwellings. They’re big numbers. The housing asset class is worth more than three times the value of Australian superannuation funds, which is currently running at about $2 trillion, and more than four times the value of Australian listed stock, at $1.5 trillion.
The profile of an Australian investor (who is that person, where do they live, what do they do, and what turns them on?) has been the subject of a profiling exercise that was carried out by CoreLogic RP Data – The Profile of the Australian Residential Property Investor – and that report is out.
Head of research for Australia, Cameron Cusher, from CoreLogic RP Data joins me.
Cameron, thanks for your time.
Cameron: Thanks for having me, Kevin.
Kevin: What are some of the key lessons from this? There is just so much information in this report, but what were the stand-outs for you, Cameron?
Cameron: As you said, there is lots of information in there, but there are lots of stand-outs. But I think what we really wanted to do is just paint the picture of the size of the investor market and how important it is to the housing market.
I think some of the more impressive figures: we estimated there are 2.6 million properties that are owned by investors across the country and the total value of those properties comes in at $1.37 trillion.
If we look at the split between houses and units, I think that’s where it gets very interesting. Nationally, 26.9% of housing stock is owned by investors but only 17.3% of houses. Compare that to units where you’re looking at 48.1% of units nationally are actually owned by investors. So the investor market tends to have a preference for unit stock.
Obviously there are a few reasons for that. Units tend to be more prevalent in the areas where people are renting. A lot of investors own holiday properties, and units on a holiday location are attractive, as well. Plus, obviously, the buying price for a unit is typically lower than a house and the yields tend to be higher, as well.
Kevin: Given that that’s the case, I would imagine that investment stock is skewed more toward the lower valuation bracket, Cameron. Would that be right?
Cameron: It is. We did it based on the current value estimates, and it showed that 37.3% of investor-owned dwellings had a market value of between $300,000 and $500,000, and the majority of them overall were below that $500,000 value range compared to owner-occupiers where it was only 46.9% sitting below $500,000.
Kevin: What did you find out about where they like to buy?
Cameron: What we found is, obviously, the capital cities are very popular locations. Darwin was actually the statistical division nationally with the highest proportion of investor-owned properties – 42.9%. Then in second place was Gold Coast with 32.8% of properties being owned by investors. Third place was Melbourne, fourth place Sydney, fifth place Brisbane. And if we look at the top 20 list, every single capital city except for Hobart actually appears on that list.
Generally speaking, it tends to be capital city housing markets, coastal lifestyle markets, and obviously also the areas where we saw a lot of investment over recent years – the mining towns.
Kevin: They even did pop up in the mining towns, didn’t they?
Cameron: They did. Particularly in areas like Pilbara, Kimberley, and even the Fitzroy and Mackay regions in Queensland where you do see a lot of mining towns, you still have a high prevalence of investor stock there.
Kevin: Let’s have a look at returns. Obviously investors have enjoyed some pretty strong capital growth in recent times, but the growth in rental income has been a little bit soft?
Cameron: It has. What we’ve seen over really the last 20 years is a fairly consistent downward trend in rental yields, and that’s due to the fact that the value of homes has risen at a much faster pace than rental rates. At the moment, we’re seeing rents falling for the first time in at least 20 years – the weakest rental market on record. What it does suggest is that a lot of the investors have been focusing more so on the capital growth potential rather than the rental return potential from these properties.
Kevin: Of course, lower mortgage rates have offset that burden of low rental yields, haven’t they?
Cameron: They certainly have. What we’ve also seen with the low interest rate environment is when we look at the taxation stats, that the benefits from negative gearing or the value of the losses claimed has reduced quite significantly over the last few years. So net rental losses are down 59% from their peak in 2007 and 2008, and the latest taxation data we have is the 2013/2014 financial year. Interest rates are obviously lower now than they were then. So we expect that the net rental losses will continue to reduce over the coming years.
Kevin: That’s an interesting look at negative gearing and its true impact. In a way, you could argue that it’s actually kept the rents a little bit lower, Cameron.
Cameron: I think that’s right. Because people haven’t been concentrating too much on the rental yield, they’ve been – I guess – more focused on the capital growth. They haven’t had the incentives to try and push those rental rates higher. I guess that’s been one of the key benefits of negative gearing. Obviously it’s a bit different city to city. Rents are still very expensive if you’re living in Sydney or in Darwin, but outside of those cities, rental growth hasn’t been all that strong over recent years.
Kevin: Of course, when and if – and I guess it’s only inevitable that they will go up – mortgage rates start to go up, rents will have to go up as well, wouldn’t they? Those yields have to remain.
Cameron: You’d certainly think so. When the interest rates go up or also when the growth in the housing market finally stops, the investors that are out there are going to have to focus much more on that rental return, so yield is going to become more important. And you would think that means higher rents, but obviously at the moment, when you have record high levels of new housing stock, a lot of it units, a lot of which will ultimately end up as rental stock, it may be a little bit hard for some of these investors to push those rents too far.
Kevin: I think my memory was that you said there were about 2.03 million individual investors in Australia. How many properties do they own on average?
Cameron: On average, they own about 1.2 properties per investor across the country. I guess the point there is that there are obviously some investors that own a lot of properties, but by and large, it’s someone that owns one or maybe two at the most investment properties. It’s not a market dominated by people owning five or six investment properties.
Kevin: Which brings us back once again to the statement that they really are mom and dad investors in the main, aren’t they?
Cameron: They do tend to be. Obviously there are exceptions to that, and I think some of the people nearing retirement probably didn’t have superannuation throughout their working life and have invested heavily in the residential property market. But I think you’ll find most people under the age of, say, 50 who have had their whole working life with superannuation are not going to be out there owning five and six properties – maybe one or maybe two properties.
Kevin: Okay, some of the bottom-line summaries there: concentration of where they are, and they’re predominately in the cities, I guess, in the units. Is that right?
Cameron: That’s right. Primarily in the capital cities and the larger regional towns in the unit market. When we look at the locations, they tend to be around the CBDs. In Sydney, obviously around the harbor there. But also when we look at where these units are located that are heavily focused on the investment segment, you tend to find universities and hospitals are big drivers of people owning investment properties around those locations.
Kevin: Cameron Cusher has been my guest, head of Research Australia for CoreLogic RP Data.
Cameron, thanks again for your time.
Cameron: Thanks for having me, Kevin.