Investors are adjusting but what does it mean for housing and rents?

It’s coming towards five months since the 12 May Federal Budget, and we’re starting to get a clearer picture of how the changes are affecting the real estate market and, in particular, the rental market.

You might recall that we were told the changes to taxation were largely driven by what the government said was a strategy to help a greater number of first home buyers into the property market. What they didn’t focus on was the effect those changes might have on the rental market.

We’re now seeing that the rental market has moved in the opposite direction to what the government’s modelling might have suggested.

Investors have substantially reduced their activity, which was a deliberate intent of the changes, in particular to negative gearing. The latest Australian Bureau of Statistics lending data cited by realestate.com.au shows investor lending fell 8.6 per cent in the June quarter.

Remember, half of the June quarter had no changes to taxation, with the changes only applying in the second half of that quarter – yet investor lending for the whole quarter dropped 8.6 per cent. On a full-quarter basis, it will be considerably higher.

Negative gearing’s unexpected outcomes

No surprise then, that the rental pool is shrinking.

This is not just a case of a substantial drop in new investors entering the market. It has also been caused by the sale of existing investment properties.

An analysis of 760,000 listings during the first seven weeks after the Budget night announcement showed that 10,100 homes were sold.

During that same period, only 6,140 new rentals were purchased and listed for rent. This equated to a net loss of about 570 rental properties per week nationally, or only 61 new rentals being added to the rental pool for every 100 properties being sold.

We don’t need Albert Einstein to tell us what happens to any product when supply drops and demand increases. We’ve seen that occur already, with SQM Research releasing figures showing that, to 29 September, national combined asking rents were up 7.3 per cent over the previous 12 months.

So much of the initial change, of course, was an immediate knee-jerk reaction to the announcement. The loss of negative gearing to many simply meant, “I won’t buy.” However, as the dust settles, we’re starting to see an increase in the number of investors who have simply restructured how they invest. We’re starting to see an increase in investors at open homes and bidding at auction.

But the reason for that is that, to balance out the effects of the drop of negative gearing on resale properties, they’ve simply reduced the amount of money they’re borrowing, which means they’re looking to buy in lower price brackets.

Financing challenges

The government’s modelling didn’t show that this was a likely effect. They stated that the dropping of negative gearing for resale properties was designed to reduce competition for first home buyers. But investors who might previously have been buying something from $800,000 to $1 million have simply dropped down to price brackets of $600,000 to $800,000 so they can borrow less money without the benefit of negative gearing.

This has actually increased competition for first home buyers, not reduced it.

The bottom line is that most people do feel most comfortable holding real estate as opposed to any other form of investment. So, with further increases in rents, we’re starting to see investment in real estate stacking up well over the longer term. The challenge simply is, “how do I finance my purchase of a resale property without negative gearing?”

It’s going to be an interesting scenario moving forward because, ultimately, the incredible shortage of rental properties that is now starting to emerge will put pressure on the government to come up with yet another strategy to supply affordable housing.

In a more recent survey, almost one in four property developers said they would be forced to scrap projects over the next year.

New polling commissioned by peak property bodies showed housing supply will take a major hit, with 60 per cent of small to medium residential and commercial property developers preparing for a significant impact on the viability and timing of projects.

Cancellations or delays in development projects would be “a catastrophe for housing supply”. The projection is that 10,000 new dwellings will not be started due to the changes in taxation, which will ultimately only put further upward pressure on real estate prices.

The strategy of investing in real estate remains an excellent tool for wealth creation. It’s simply a case now of working out how to finance those purchases without the need for negative gearing when buying resale properties.