If there's a housing crisis, is there a solution?

The property market in Australia provides a lot of fascination for endless discussions, research, speculation and, in particular investment, across the country.

Why then are investors retreating from the market at a time where rents are rising and tenants are scrambling to secure homes, with the vacancy rate tumbling to 1% in February?

As we know, in May 2022 the RBA brought forward the unwelcome decision to raise the cash rate. As if they couldn’t jump off a runaway train, they have relentlessly continued to make incremental increases to the cash rate every month since, in an effort to restore a more acceptable level of inflation.

One of the consequences of this monetary policy is that investor numbers have declined. Between March 2022 and January 2023 the volume of new investment loans fell around 47%. Although rents were rising during this time, mortgage payments for new investment mortgages, on average, increased faster than rents.

You may say, “So what? They can negatively gear the property and hope for capital gain in the longer term”.

Well, the capital growth incentive is not what it used to be. In the current environment, opportunities for capital gains have been weakened by factors such as high interest rates and low consumer confidence.  The RBA has flagged a shift in the Australian economy whereby low inflation and interest rates are not as potential as they once were. Although over the past ten years we have seen capital growth of 57%, it is unlikely we will experience similar numbers in the decade to come.

Other deterrents for investors include a higher premium on mortgage rates relative to owner-occupiers, changes to depreciation benefits in 2017, and greater protections and rights for renters through updates to tenancy law. However, it appears that interest rates are the overarching influence when it comes to investing, as figures show that investors are not dissuaded when interest rates are low.

The government has a lot of work to do in the housing sector in this country. The reduction in new investment purchases exacerbates the issue of low rental supply and rising rents. However, investment ownership also drains valuable supply for potential ownership for owner-occupiers. There are various policies from Build-to-Rent, social and affordable housing, stamp duty and land tax variations, being floated about. Finding a balance to give equal opportunity to all is the challenge.

Meanwhile……what we do know is that there are always lifestyle, financial and personal reasons to buy and sell, so the real estate market will continue to tick over. The question to answer is whether this decision will be a purely commercial one for you.