One of the key engines of Australia’s five-year housing boom is losing steam.
Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending. The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest-only mortgages -- a form of financing favored by people buying homes to rent out or hold as an investment.
Australia’s generous tax breaks for landlords, combined with record-low borrowing costs, have made the nation home to more than 2 million property investors. Demand from those buyers has contributed to a bull run that has catapulted Sydney and Melbourne into the ranks of the world’s priciest property markets. Now, signs are emerging that the curbs are starting to deter speculators -- and home prices are finally starting to cool.
Take the case of 29-year-old Taku Ekanayake, a former IT salesman who owns six investment properties in cities including Adelaide and Brisbane. He shelved plans to add a Melbourne apartment to his portfolio after rising rates increased his annual mortgage bill by A$14,400 ($11,360). The biggest banks have hiked rates on interest-only mortgages by an average of 55 basis points this year, according to Citigroup Inc.
“With the rate hikes I don’t think it is a very viable option for me to invest there now,” he said.
In other signs the market is cooling, property auction clearance rates in Sydney have held below 70 percent in seven of the past eight weeks, compared to as high as 81 percent in March before the curbs were imposed. And investor loans accounted for 37 percent of new mortgages in May, down from this year’s peak of 41 percent in January.
That’s helping take the heat out of property prices, particularly in Sydney, the world’s second-most expensive housing market. Price growth in the city slowed to 2.2 percent in the three months through July, down from a peak of 5 percent earlier this year, CoreLogic Inc. said Tuesday. In Melbourne, rolling quarterly price growth has eased to 4.2 percent.
“There have been some signs that conditions in the Sydney and Melbourne markets have eased a little of late,” the Reserve Bank of Australia said on Friday.
While the regulatory curbs are aimed at ensuring the financial system could weather any downturn in the property cycle, they may also make it easier for first-time buyers to break into the market. Housing has become a popular investment for Australians, who can claim the cost of an investment property -- including interest payments -- as a deduction against other income, such as salary, and get a capital gains tax discount if they hold the property for more than 12 months.
The favorable tax treatment for investors has become a hot political issue, with young first-time buyers protesting they are being priced out of the market. The opposition Labor party has pledged to wind back the concessions if elected to office, while the government announced a range of policies in its May budget aimed at addressing housing affordability.
Now, with costs increasing, and price growth slowing, property may lose some of its luster as an investment asset.
The changes “reduce investors’ ability to pay, and means they have to pay owner-occupier values rather than investor values,” said Angie Zigomanis, senior manager, residential property, at BIS Oxford Economics in Melbourne. The restrictions will take “some of the bubble and froth” out of the market, he said, forecasting median Sydney house prices will decline 5 percent by the end of mid-2019 as investors retreat.
Investment activity across the housing market may slow down after the new macroprudential policies were announced last March. The 2017-18 financial year may come with lower capital gains than 2016-17 because of higher mortgage rates and affordability constraints.
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