Investment activity is picking up in Australia’s capital-city real estate markets, with property investors increasingly applying for new loans to fund purchases.
The fast-growing trend suggests the current bargain-level prices for many apartments in Melbourne may not last for long.
Mortgage brokers say inquiries from investors for new loans are up 50 per cent on 2020 figures.
Some investors are eyeing an opportunity in the market on the back of the Reserve Bank continuing to maintain it will keep interest rates low for the foreseeable future. In addition, some lenders are cutting interest rates for investment loans.
When prices rise, investors often return to the market as they can see the potential for capital growth.
According to the latest Australian Bureau of Statistics data, investor loans throughout Australia increased by 2.1 per cent in April, reaching a record four-year high of $8.05 billion.
By contrast, first-home buyer loans dropped 1.9 per cent in the same month.
In Victoria, investor lending rose 2.2 per cent in the same period.
Many Victorian agents are reporting that investors prefer houses over units as they continue to see the effects of the pandemic on rental demand and prices.
But well-researched and savvy property investors typically take a medium-term (three-to-five years) approach to investing – and for them, the prospect of handsome capital gains are on the horizon.
Nelson Alexander company director Arch Staver says almost all of the advice from economists and property advisers is to overlook apartments.
“But by overlooking them, you are missing a terrific opportunity,” he says.
“Vendors selling apartments are highly motivated.
“The current situation takes me back to the Docklands Harbour situation in around 2000 when that area was being aggressively developed. A lot of apartments were being bought off the plan and often when settlement came around, many of the vendors had negative equity in their properties.
“It took about three years, but then the apartments at Docklands and in other inner areas began to appreciate quite aggressively.”
Developers are concerned that Victoria could face a shortage of apartments in as little as two years, partly because of tax increases and poor planning.
Research commissioned by the Property Council of Australia shows the supply of units in Melbourne will be at crisis levels by 2024, with construction forecast to slump to only 29 per cent of 2017 levels.
The council’s Victorian executive director Danni Hunter says the crisis has been brewing for years.
“As a result of long-term planning system issues as well as negative tax implications, apartment buyers have been put at a disadvantage,” Ms Hunter says.
“While planning approval numbers are increasing, they mask a decline in real construction activity, new investment and the commencement of new projects that will lead us to a severe structural undersupply by 2024.
“Without changes in policy, Melbourne’s apartment building industry will shed 6000 ongoing jobs and produce $1.1 billion less in housing assets over the next four years.”
With new supply likely to be constrained going forward and cashed-up investors increasingly locking horns with first-home buyers to secure sub-$1 million properties, apartment prices seem certain to benefit.
Mr Staver says the best approach to buying apartments is to be in the right place during a cycle and to take advantage of those periods when lower prices are on offer.
“Clearly, the apartment market is subdued,” he says.
“That is because a lot of people are not buying into apartments. They are looking for houses.
“But there is really good opportunity to buy apartments at below or very near their replacement value. If you then hold steady, you will certainly reap the benefits in a three to five-year cycle.”
In June, the chairman of the Australian Prudential Regulation Authority Wayne Byres told a Senate estimates hearing that he expected investors would continue returning to the housing market.
Mr Byres says investor lending is now on the rise.
“Certainly the commitments to investors had been very low through 2020, but they have started to pick up again in recent months, so I think we will start to see them come back to the market,” he says.
Agents in the major capital cities expect to see an uptick in unit prices because investors are returning to the market and taking confidence in an improving rental market.
Mr Staver says the reality was that Australia’s overseas student market would come back once international border restrictions were lifted, expected in 2022.
He says there are good opportunities to buy quality apartments right across from the Docklands precinct to the CBD and inner-city suburbs such as Fitzroy and Carlton.
Interestingly, Nelson Alexander’s sales data shows that apartments built in the 1970s and 1960s have all withstood the recent downturn in the apartment market.
“In fact, they have pushed ahead, not unlike the way that traditional houses have pushed ahead,” Mr Staver notes.
“It is only a question of time before the market will come back for a lot of the more modern apartments. And, of course, these apartments have many extra amenities such as lifts, security entrances and other internal amenities, including gyms.”
If you would like more information on buying and selling in the current market, please contact any Nelson Alexander office or fill out the form below for an appraisal.