PodcastsThe Property Couch459 | How Can We Solve Australia's Growing Demand for Property? - Chat with Paul Ryan

459 | How Can We Solve Australia's Growing Demand for Property? - Chat with Paul Ryan
The Property CouchWed Sep 06 2023
RBA and Economist Background:
- Paul Ryan worked at the Reserve Bank of Australia (RBA) for over a decade conducting research on the Australian economy, focusing on housing markets, lending risks, and regulatory effects on property markets.
- The RBA provided an environment with significant talent and opportunities for individual research to better understand the economy.
Understanding Property Risk:
- RBA research focused on evaluating risk factors in the housing market, particularly related to investor activity.
- Investor lending was considered a possible risk due to its potential to amplify housing market cycles.
- Investors can drive up prices during upswings and exit the market during downturns, affecting housing affordability for owner-occupiers.
- However, evidence suggests that investor default rates are generally lower than those of owner-occupiers because investors tend to have higher incomes and wealth.
Macroprudential Measures:
- To address potential risks from investor lending, APRA introduced macroprudential measures such as limits on investor lending and interest-only lending.
- These measures aimed to slow down price growth and reduce speculative investment activities in certain regions.
- Higher interest rates for investors were implemented by banks even after these limits were removed as banks continued charging a premium for investor loans.
Comparisons with International Markets:
- Research involved comparing Australia's housing market with other international markets.
- An anomaly in Australia is that rental properties are predominantly owned by households rather than corporations.
- This leads to higher household debt levels compared to countries where corporate entities own more rental properties.
- Tax settings incentivize households over corporations due to advantages like avoiding land tax thresholds.
Benefits of Corporate Ownership:
- Encouraging build-to-rent investment could provide higher quality rental accommodation as experienced overseas. The professionalism of property management services may improve as well.
- Higher-quality rentals could reduce tenant turnover, resulting in greater stability for renters. Build-to-rent developers claim profitability through providing high-quality rentals instead of lower-quality options.
Blend of Rental Accommodation:
- The focus should not be an "either/or" approach when it comes to ownership of rental properties.
- Corporate and household investors can both contribute to the mix, providing different types of rental accommodation and addressing different market segments.
- High-quality rentals managed by households can offer efficient and safe enjoyment for tenants.
Potential Solutions:
- Research shows that corporate-owned rentals often deliver better quality than individual investor-owned properties.
- Providing tax incentives for build-to-rent developers may encourage increased supply in this area.
- Balancing regulations against risks while considering the impact on household investors is crucial for a well-functioning housing market.
Property Market Performance:
- Property market in the East Coast and bigger cities has performed well in the beginning of the year
- Surprising home price growth this year, contrary to negative forecasts
- Interest rates have continued to rise but prices have increased every month
- Regional areas have seen flat growth while capitals have regained previous falls
Factors Driving Demand:
- Increased demand due to catch-up immigration and changes in household preferences post-pandemic
- People seeking more space, spare bedrooms for home offices, and larger gardens due to remote work
- Weight of demand stronger than expected, leading to housing demand outpacing new stock
Sustainability of Demand:
- Uncertain if current demand is sustainable or if it will flatten out
- Home price valuations are affected by borrowing capacity and long-term borrowing trends
- Current trend of buyers with large deposits may change as interest rates increase further
- Strong demand indicators suggest ongoing property price growth
Investor Activity:
- Investors make up around a third of new credit, similar to pre-pandemic levels
- Pandemic period saw a shift from investors to first-time buyers, but now investors are returning
- Investors less affected by interest rate increases due to large equity gains and varying investment strategies
Regional Areas vs. Capital Cities:
- During the pandemic, regional areas saw an increase in demand compared to capital cities
- Preference for bigger homes led to outperformance of peripheral suburbs with larger houses
- Although some reversal seen, regional areas continue to outperform capital cities in terms of price growth.