The property market in Australia is constantly evolving, influenced by a range of factors from economic shifts to government policies and global market conditions. However, one of the most significant drivers of market dynamics is the behavior of property investors. Their ability to influence market sentiment is profound, especially in key urban centers like Sydney and Melbourne, where they make up a significant portion of the buyer pool.
In recent years, Australian property markets have experienced a period of instability and uncertainty, particularly in response to tightened lending conditions, political changes, and fluctuating interest rates. For a while, investors began to pull back from the market due to a combination of tightened credit availability, concerns over tax reforms, and the aftermath of the Banking Royal Commission. However, as we moved into the latter half of 2019, investor activity began to pick up again, and this resurgence has brought new energy to the property market, not just for investors but for first-time home buyers and owner-occupiers as well.
At RiskWise Property Research, we are at the forefront of tracking and analyzing these market changes. Our team is dedicated to providing the latest insights and information to help investors understand the current market conditions and make well-informed decisions. This report will explore how the return of investor activity is providing a much-needed boost to the Australian property market, especially in terms of price growth, auction clearance rates, and consumer confidence.
The Role of Investors in the Australian Property Market
Investors play a pivotal role in shaping property prices, particularly in major metropolitan markets like Sydney and Melbourne. Historically, these markets have relied heavily on the participation of investors, who often act as the primary buyers in the market, especially in areas where there is strong demand for rental properties. When investors are active in the market, they help drive price growth by increasing competition for available properties, which in turn leads to higher sale prices.
However, when investor sentiment drops, it has a ripple effect on the broader market. As RiskWise Property Research has previously noted, investors are highly sensitive to changes in economic conditions, interest rates, and policy shifts. When these factors lead to higher out-of-pocket expenses, investors tend to pull back, and this can result in reduced demand, falling prices, and an overall stagnation in the market.
At the same time, owner-occupiers, who are typically less sensitive to economic fluctuations, tend to remain more stable. They are generally less concerned about short-term price fluctuations and are more focused on securing a property that meets their long-term needs. However, the presence of investors can often act as a catalyst for price growth, which in turn helps drive confidence among first-time home buyers and owner-occupiers, who may be more likely to enter the market when they see price appreciation occurring.
Key Drivers of Investor Activity in 2019
Several key factors have contributed to the resurgence of investor activity in the second half of 2019. These factors have combined to improve market conditions, reduce investor uncertainty, and create opportunities for growth.
1. Interest Rate Cuts and Improved Affordability
One of the most significant developments in 2019 was the Reserve Bank of Australia’s (RBA) decision to cut interest rates multiple times. In 2019 alone, the RBA slashed the cash rate by 0.75% to a record low of 1.0%. Lower interest rates directly impact the cost of borrowing, making it easier and more affordable for investors to obtain financing. The lower cost of borrowing has not only increased the affordability of investment properties but also improved the serviceability of loans for existing investors.
These rate cuts have had a significant effect on the broader property market, especially for investors in Sydney and Melbourne, where prices had been softening due to tighter lending conditions and market corrections. With the cost of financing lower than it had been in previous years, investors are finding it more affordable to enter the market, particularly in inner-city apartments and high-demand suburbs. The improved affordability has acted as a major stimulus for renewed investor activity, helping to drive up demand and, ultimately, property values.
2. Easing of Credit Restrictions
Another critical factor in the resurgence of investor activity has been the relaxation of credit restrictions by APRA (the Australian Prudential Regulation Authority). Following a period of tight lending conditions in the wake of the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry, regulatory authorities have taken steps to ease some of the more restrictive lending practices that had been put in place to reduce risk in the banking system.
APRA’s adjustments to floor assessment rates and changes to the criteria used to determine lending eligibility have made it easier for investors to secure financing. These adjustments, alongside the interest rate cuts, have effectively lowered the barriers to entry for investors, particularly those looking to purchase investment properties in highly competitive markets like Sydney and Melbourne. The easing of credit conditions has made a significant difference in investor confidence, leading to increased demand in the property market.
3. Political Stability and the Federal Election Outcome
The federal election in 2019 played a major role in boosting investor confidence in the market. Leading up to the election, there was significant concern about potential taxation changes proposed by the Labor Party, including the reduction of negative gearing and the cutting of the capital gains tax discount. These changes would have had a significant impact on investor returns, leading many investors to pull back from the market or delay their purchasing decisions.
However, with the Coalition securing victory in the election, these proposed tax changes were effectively removed from the table, offering political stability that helped boost investor confidence. As a result, investors who had been on the sidelines waiting for clarity on taxation policies began to re-enter the market, contributing to the increased investor activity seen in the second half of 2019.
4. Tax Cuts and Consumer Confidence
In addition to the interest rate cuts and the political stability brought about by the election, the Australian government’s tax cuts in 2019 helped provide a further boost to consumer confidence. Lower taxes put more disposable income in the hands of both investors and owner-occupiers, helping to increase spending and demand in the property market. As consumer confidence grew, so did investor sentiment, leading to a continued rise in property demand and a further uptick in property values.
The Effect of Increased Investor Activity on Property Prices
With the return of investors to the market, the effects on property prices have been swift and noticeable. As investor activity increases, it contributes directly to price growth and auction clearance rates. This has been particularly evident in Sydney and Melbourne, where investor interest has historically been high.
According to CoreLogic data, Sydney’s median dwelling value increased by 1.7% in September 2019, reaching $805,424, while Melbourne saw a similar increase, with the median dwelling value reaching $634,913. This price growth is largely driven by the increased demand for properties due to the uptick in investor activity.
One of the most reliable indicators of the market’s strength is auction clearance rates. When investors are active in the market, there is generally a higher level of competition for available properties, which leads to higher clearance rates and stronger price performance. In the latter half of 2019, Sydney’s and Melbourne’s auction clearance rates rose significantly, indicating that demand was outstripping supply, and that investors were actively competing for properties. As a result, sellers in these markets were more willing to list properties, knowing there would be greater demand and less chance of being stuck with an unsold property.
Investor Sentiment: A Strong Indicator of Market Momentum
At RiskWise Property Research, we closely monitor investor sentiment, as it serves as one of the best indicators of market momentum. When investors are confident, they are more likely to enter the market and make purchasing decisions, which in turn drives price growth. We have seen that as investor activity has increased, so too has price growth, particularly in the key urban markets of Sydney and Melbourne.
Mr. Peleg, CEO of RiskWise Property Research, emphasizes that the key indicator for market sentiment is the investor lending finance—especially loans excluding refinancing. If the volume of lending for investment purposes increases, we can expect to see a significant acceleration in dwelling price growth as well. The more investors enter the market, the more competition there is for properties, which directly leads to higher prices.
Shifting Focus: Family-Friendly Properties Over High-Rise Units
While investor activity is increasing overall, there has been a noticeable shift in the type of properties that investors are targeting. In particular, construction defects and oversupply issues in high-rise apartments in Sydney and Melbourne have led many investors to look for more stable, family-oriented properties.
Detached homes, townhouses, and suburban properties with good access to schools, public transport, and local amenities are increasingly attractive to investors who are looking for long-term capital growth and
stable rental demand. This shift in focus is helping to stabilize the market in areas where high-rise apartments have struggled due to oversupply and construction quality issues.
Conclusion: The Path Forward for Investors
The resurgence of investor activity in the Australian property market is a critical turning point that has brought new energy and optimism to the market. At RiskWise Property Research, we have been closely tracking the factors that contribute to this shift, and our findings point to a strong recovery in investor confidence driven by low interest rates, eased credit restrictions, and political stability.
As investor interest continues to rise, we expect to see further price growth and increased auction clearance rates, particularly in markets like Sydney and Melbourne, where demand remains high. Investors who are looking to enter the market should focus on areas where family-friendly properties are in demand, as these markets tend to offer more stable growth and long-term capital appreciation.
In summary, the return of investors to the property market is a positive development that signals a new chapter of growth for the Australian property market. By keeping a close eye on the factors influencing investor behavior, RiskWise Property Research will continue to provide valuable insights to help investors navigate this dynamic and evolving market.