Reserve Bank warns on investment properties

In the Reserve Bank's bulletin this month, a special article on investment property warns that investors cannot assume that capital gains will be assured for the future. SMH columnist Ross Gittins says the statement can be interpreted as a warning that prices in the investment property market could actually fall, particularly prices of rental units and inner-city apartments. The bank most likely wants to deflate the rental housing bubble before it gets bigger, making the move as it sees supply beginning to outstrip demand.

He says it's not recognised enough that the recent boom in residential property has largely been due to investor activity and not so much to owner-occupiers. Since 1990, mortgage loans to investors have grown rapidly and now make up almost a third of all home loans. Since October 2000, the monthly value of housing loan approvals has increased by 80 per cent, with loans to investors comprising over half of that increase. This year alone, the value of housing loans to investors grew by 14 per cent in April and 11 per cent in May, with the majority of investors buying units. The trend was assisted by banks becoming more willing to lend to investors, abolishing the one percentage point premium in interest that investors paid over owner-occupiers. An additional factor boosting housing lending was the move out of shares.

There is ample evidence to show that investment in property is running ahead of demand, not only in the record vacancy rates but also in falling yields, which have dropped 6 per cent in the mid-1990s to under 4 per cent currently.

As the Reserve Bank has warned, it's “unlikely that further strong price increases could co-exist with rising vacancy rates and falling rental yields for very long”.