Investor : Homebuyer Ratio - how does this affect the residential property market?
Over recent years the level of investor participation in the national housing market has hit historic high levels and the release of the 2016 census data confirms a shift towards renting, with nearly 31% of Australians now paying a landlord, up from 29.6% from the last census in 2011 and under 27% in 1991.
According to the latest Census data (2016), the Australian residential market is made up of approximately 65% owner-occupiers and 31% investors, the remaining 4% being ‘other’ forms of housing.
So what is the relevance of the owner-occupier : investor ratio when buying property?
Both owner-occupiers and investors are crucial to the health, stability and performance of the Australian property market; we all need shelter and it is through property as an asset class that a majority of Australians’ wealth is invested. When assessing a location for investment purposes, it’s important to ensure there are enough potential tenants to rent the property without too much competition from other landlords, as well as enough owner-occupiers to buy the property when it comes time to sell.
Too much investor activity will cause speculation and volatility within the market, which can exacerbate the boom/bust property cycles. When the market sees a spike in investor activity, developers will be quick to chase a dollar, leading to construction upswings and a corresponding increase in supply. If population growth isn’t high enough to support this new supply, the market will head into oversupply characterized by 3 outcomes: higher vacancy rates, downward pressure on rents and ultimately, price drops. When there is insufficient investor activity the inverse of this can be seen, worsening the living standards of renters by causing rents to increase. Hence it is important to have the balance right for sustainable growth!
Capital growth is generally proportionally higher in asset types or suburbs with a higher ratio of owner-occupiers to renters. This can be put down to the emotional value owner-occupiers place on their need to be in a particular area or asset type. For example, if the market is made up of 65%-70% owner-occupiers then this is the ideal market to attract when it comes time to sell. If the location and/or property is desirable to owner-occupiers then this will translate to greater demand and put stronger pressure on price growth and deliver better capital growth over the long term.
Investors need to protect their exit strategy, that is, buy with the end in sight. Ideally an investor should aim to be selling at the peak of the pricing cycle but unfortunately this isn’t always the case. If an investor’s financial position changes for the worse or the economy is in a slump resulting in a forced sale, ideally two things are needed – a quick sale and a reasonable price (not a fire sale)!
Suburbs dominated by owner-occupiers are typically better maintained as owner-occupiers generally take greater pride in the appearance of their home as opposed to tenants and will often spend money to maintain this appearance. An owner-occupier may be willing to incur an expense that might not make commercial sense but will help uphold the values of all properties in the area, which benefits local investors. They are also more likely to try to hold onto the family home, which will limit stock coming to market thereby curbing rising sale volumes in the area, assisting in underpinning property values.
Conversely, landlords generally spend the bare minimum on their investment properties, which can keep prices subdued when the majority of properties in the area are investor stock. Similarly, if you need to sell and so do a lot of other landlords then you will have a wave of supply competing for a shallow buyer pool which will ultimately make it harder to sell as well as result in a race to the bottom for prices.
Cash Flow & Yield
The ratio of ownership type cannot be looked at in isolation. The vacancy rate is an important metric to consider with the ownership ratio in order to get a meaningful gauge on the area. The more investors, the more rentals; the more rental competition and proportional reduction in rental demand, the higher vacancy rates and lack of rental growth. This is not necessarily the case if the vacancy rate is low as it indicates the area is desirable and there is solid demand from tenants.
Similarly, if the area has a high proportion of owner occupiers in isolation this might be appealing, as there will not be as many competing landlords. But if the vacancy rate is higher then it indicates rental demand is weak in that area or there may be an oversupply which will impact both rental and capital returns.
So what is the healthy balance? An ideal situation would have 25% or less of investors owning property at a suburb level but anything up to 35% is healthy provided vacancy rates are lower. A ratio of 50% or more should be triggering alarm bells particularly if the vacancy rate is greater than 3%. As a final note, it is advisable to avoid areas that are completely dominated by investors.