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

The Property Couch

Wed 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.