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

For a very brief period young people were able to get a look into buying property but now the pendulum has swung back drastically.

For a moment, Australia’s housing market was about the young. People were getting into their first home. First-home buyers were ascendant and it was a glorious and hopeful time. A time when dreams were made into reality.

That time is over. Show up at an auction and a 51-year-old man will climb out of his Porsche and bid against you, until you are forced out of the bidding and he adds a dozenth home to his portfolio. i.e. Australia is back to normal, as the next graph shows.

That’s right, as the graph illustrates, we are back to a world where investors borrow a greater share of new home lending than first homeowners.

This is usual for Australia – it was only for a short period there at the end of 2020 that investors got nervous enough to disappear for a moment, and the way was made clear for young families to finally buy their own home. (We saw a similar brief swap back in the global financial crisis of 2008-09.

What does this mean?

House prices have been rising at an extremely rapid rate. The average price of a home in Sydney went up by a staggering 13.5 per cent over the last 12 months according to CoreLogic. That is a staggeringly fast growth rate – if prices rose that fast in a sustained way, 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 the capital appreciation – they would love their investment to double every 5.5 years! So they are attracted to markets with rising prices.

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

I feel bad for first home buyers who are squeezed out, but I don’t want to pile on housing investors too hard.

Obviously they don’t take houses out of circulation (except in the rare case of leaving an apartment vacant, a phenomenon people love to talk about, but which you rarely actually see.)

Everyone who rents in the private market depends on a housing investor somewhere. Rental homes are a vital product in the Australian economy that we almost all depend on at some point in our lives. Yes, some landlords are heartless and rent out mouldy homes, but some are patient and don’t even lift rents every year.

Rents, by the way are up far less than property prices. Capital city rents are up 3.3 per cent and rents in regional areas are up 9.3 per cent. In that sense, it’s not such a bad time to be renting – in relative terms it is getting cheaper!

Why is property investing so popular in Australia?

One answer is negative gearing. If you have an investment property and spend more money on it every year than you receive in rent, (i.e. mortgages, rates, insurance, repairs and maintenance are less than rent), that loss counts as a tax deduction. This is known as “negative gearing” and it is a popular investment approach.

Of course, you haven’t ended up ahead at this point. You can’t make more from a tax deduction than you lose running the property. You still need to make a gain on the value of the home for it to actually work as an investment.

Luckily there’s another tax break for investors – the capital gains tax discount. When they sell the property, they need only pay tax on half the profits, (assuming the property has been owned for over a year).

Laws can change. But will these laws? The Labor Party took a couple of policies to the last election – abolishing negative gearing on established properties and reducing the capital gains tax discount.

They got flogged at that election and dumped those policies. You can pretty much guarantee no party will have the courage to try to change those rules again for some time. The rules around investment property are probably pretty safe.

Where is the investor frenzy hottest?

As the next graph shows, investors are spending most in New South Wales, where they borrowed almost twice as much as First Home Buyers in May. The only parts of the country where the pattern is reversed are WA and NT.

First home buyers are struggling to keep up. The average loan size for a first homebuyer is now $465,000, up from $355,000 in 2017. How big do the loans have to be to beat out all the property investors?

With interest rates at record lows, loans are easy to service, but the risk for the young first homebuyer is that rising rates in a few years make that loan hard to afford. And unlike a property investor you don’t have rent coming in to help you pay it off.

Australia’s young people look set to be stuck renting until something major changes.