Investors return to property, but who is paying the price?
The investor exodus from established housing appears to have been short-lived, but the finding comes with a warning.
Well, it didn’t take too long, and I guess we’re going to hear a lot of people saying, “I told you so.”
Back in May our Federal Treasurer, Jim Chalmers, announced changes that will restrict negative gearing on established residential properties purchased after 12 May 2026, with the new rules commencing from 1 July 2027. Negative gearing will still apply to the purchase of brand-new properties and commercial real estate.
The objective, the Treasurer said, was to drive investors out of the established property market, opening the door for more first home buyers to purchase. Those with experience in the real estate market warned, however, that taking investors out of the established market would result in a contraction of the overall number of properties available in the rental marketplace.
About a third of Australians depend on the rental market for their home. They depend on investors to purchase the properties they rent.
The Government’s concept was that a large pool of first home buyers would now be able to purchase properties that were previously bought by investors, while those investors would instead move into buying brand-new developer stock.
Well, we’re now three months down the track, and any real estate company with a large rent roll will tell you that investors have, until now, hardly been seen.
The Government may well claim this was exactly its intent, however, looking deeper at what has happened over the past three months, the normal volume of properties being sold out of rental portfolios has continued and, in fact, picked up.
No matter what is happening in the market, there are always people who sadly pass away and whose investment properties need to be sold.
We have people who are now retiring who want to sell their rental properties and people divorcing who need to sell their properties.
More recently, we’ve also seen a large number of baby boomers selling their investment properties so they can help their children buy homes of their own.
So, the rental pool has been shrinking.
Normally, new investors would balance out those properties leaving the rental market, but that hasn’t been happening. Within just three months, we’re starting to see the trend of what lies ahead.
Increased competition for affordable homes
What has also become increasingly apparent is that investors who may previously have bought a property for somewhere between $800,000 and $900,000 are finding they can no longer find or buy suitable investment properties under $1.2 million.
Still wanting to invest, many have simply moved into a lower price bracket and become investor buyers in the $500,000 to $700,000 range.
The Government’s policy has increased competition in precisely the market where many first home buyers would otherwise have been looking.
You might also recall that the Treasurer also quoted Treasury modelling claiming the elimination of negative gearing in the resale sector would only increase rents by $2 per week. Well, as fewer properties come into the rental market, that projected increase has already been surpassed in the first three months following the announcement.
It’s no surprise that Ray White’s research arm, along with our own office research, is showing the return of investors as they simply restructure their investment strategies.
Most of these investors well and truly understand that real estate has been the backbone of wealth creation in Australia. Many have either put in a larger deposit to purchase a property or accepted that they will spread any negative annual return over a longer period of time, rather than simply claiming the benefit in the early years of investing.
Rent price pressure
Yes, a percentage of investors have switched to commercial real estate, while others have been able to move into the price bracket of new development stock.
Neither of those strategies helps the typical Australian tenant who needs affordable rental accommodation.
The result is that upward pressure will continue on residential rents, and effectively what the government may have done in the long term is have tenants cover the cost of negative gearing through higher rents.
The last time a government removed negative gearing in Australia was back in the 1980s.
It lasted just two years before it had to be reinstated because of the resultant rental crisis.
Hopefully, it won’t take two years this time.
