Property investors are fleeing as demand shock sets in

The latest lending figures suggest a major shift is under way in Australia’s property market but not the one that was necessarily intended when major tax changes were introduced.

As was planned, investors pulling back sharply and taking the heat out of what was an overcooked property market.

But the first home buyers the Federal Budget was intending to help are showing little appetite to pick up the lower-priced properties.

New data from the Australian Bureau of Statistics shows the number of new home loans fell 5.4 per cent to 134,225 in the June quarter, returning lending activity to levels similar to those seen a year earlier.

But it’s the collapse in investor activity that has stood out.

The number of new investor loans plunged 8.6 per cent during the quarter, the biggest quarterly fall since September 2022. Annual growth in investor lending also slowed, from 19.4 per cent in March to just 2.8 per cent.

New South Wales, Victoria and Queensland led the decline, with investor loan numbers falling 15.5 per cent, 14.2 per cent and 10.1 per cent respectively.

The figures provide fresh evidence that higher interest rates and changes to property taxation are beginning to reshape the market, potentially removing a significant source of demand at a time when housing conditions are already weakening.

KPMG Urban Economist Terry Rawnsley said the figures pointed to a slowing market led by reduced activity in NSW and Victoria, with the effects of higher interest rates and the Federal Budget’s changes to negative gearing and capital gains tax concessions already becoming apparent.

For investors, however, the retreat is not happening uniformly across the country.

Investor loan sizes in Queensland, South Australia and Western Australia continued to increase, with WA reaching a record average investor loan size of $678,000.

Mr Rawnsley said strong population growth, tight rental vacancies and expectations of further price growth were continuing to attract investors away from the larger eastern states, creating a striking divide between the major housing markets.

He added that affordability challenges remain a key issue for first home buyers.

The average first home buyer loan increased to almost $627,000 nationally in June, reflecting the large mortgages now required to enter the housing market. 

“Although loan sizes eased in New South Wales, Queensland and South Australia over the quarter, first home buyers across the country continue to take on substantial levels of debt as high housing prices remain a barrier to home ownership,” Mr Rawnsley said.

Investors are pulling back, leaving a demand void

One of the arguments surrounding the Federal Budget’s property tax changes was that reducing some of the advantages available to investors would create more opportunities for first home buyers.

The latest lending figures suggest that transition has not yet transpired.

The number of new owner-occupier loans fell 3.3 per cent during the June quarter, while first home buyer loans dropped another 2.9 per cent after falling 3.6 per cent in the previous quarter.

Cameron Kusher, Chief Economist, Herron Todd White, said the figures showed investors had taken a significant hit but first home buyers were failing to fill the gap.

“Investor lending took a real hit this quarter, with the number of investor loans falling 8.6 per cent, the largest quarterly fall since December 2022,” Mr Kusher said.

“In addition, the value of investor loans dropped 10.2 per cent, the biggest fall since September 2022.”

The problem for policymakers is that the number of first home buyers is falling at the same time.

“Some of the reasoning behind the recent tax changes was to help first home buyers get a foot in the door, but the data tells a different story,” Mr Kusher said.

“The number of loans to first home buyers fell for the second consecutive quarter, even as the value of those loans rose, meaning the first home buyers who are borrowing are paying more to do so.”

That combination points to weaker overall demand rather than simply a change in the composition of buyers.

“This is more evidence that these tax changes have dented market confidence,” Mr Kusher said.

“It’s not just investors pulling back; first home buyers are hesitant too, and that’s reducing demand for mortgages and pushing values lower.”

The average new loan size also continues to rise, reaching $727,494, up 6.7 per cent over the year.

First home buyer average loan sizes increased even faster, rising 10 per cent year-on-year.

Mr Kusher said it showed those still entering the market were having to borrow significantly more than they were a year earlier.

“That leaves the market facing a potentially uncomfortable combination: fewer people taking out loans, but those who do borrow are taking on larger debts.”

Full investor exodus not yet showing in data

A more dramatic assessment was issued by the Property Investment Professionals of Australia Chair, Cate Bakos, who said established property investors had effectively disappeared following the Budget changes.

“Established property investors – outside of self-managed super funds for a very brief window – have pretty much left our market since 12 May,” Ms Bakos said.

“Maybe two per cent still exist.”

Ms Bakos said the latest ABS figures captured only the first half of the period since the Budget announcement, meaning the full effect of the changes had yet to emerge.

Investors are a significant component of demand in many parts of Australia, particularly where rental yields and expectations of future price growth have historically attracted buyers.

But the figures also show that their retreat is highly uneven.

More than 40 per cent of new loans in NSW, Queensland, South Australia and the Northern Territory went to investors during the quarter, according to Mr Kusher, with the NT approaching half of all new loans at 48.5 per cent.

Western Australia and Queensland, meanwhile, continue to benefit from population growth, comparatively affordable housing and tight rental markets.

Mr Rawnsley said housing activity remained stronger in the nation’s growth states, with rising loan sizes in Queensland, SA and WA.

That regional divergence could become an increasingly important feature of the housing market.

The latest data also does not point towards a sudden collapse in national housing demand.

Maree Kilroy, Oxford Economics Australia, Lead Economist, said total listings had increased as fewer prospective buyers attended open homes, with median days on market rising and auction clearance rates falling below 50 per cent.

She did, however, stress that a resilient labour market, population growth, limited new dwelling supply and Australia’s underlying housing shortage should provide a buffer against more extreme price scenarios.

Mr Kusher saw the near-term outlook as more subdued due to concerns from new buyers about falling into negative equity as prices declines.

“The commentary has been that fewer investors in the market creates an opening for first home buyers,” he said.

“In theory it should. In practice, confidence is low across the board, and many first home buyers just aren’t willing to jump in right now.”

And his assessment of what comes next is blunt.

“On current settings, I don’t see anything on the horizon that changes this trajectory. These soft conditions look set to continue.”