Investor saturation in suburb hotspots will have consequences for residents and investors

Many residential property markets around Australia are currently in a ‘hot’ phase of their cycles. By that, I mean that these markets are in the maximum peak property values of their current market cycles.

It is a great time for sellers but a tough time for buyers.

Buyers in markets like Sydney, Brisbane, Perth and many regional centres are facing tough times right now. There are a number of contributing factors as to why these markets are so hot; not limited to the following:

• A record low interest rate environment is encouraging some first time buyers in to the market who otherwise would not have been able to afford to.
• First time Australian citizen investors, enticed by the low interest rates on offer and an increase in construction upstarts for off the plan investment purchases, are buying up properties at very high rates.
• In regard to non-Australian-citizen/foreign investors, the introduction of relaxed government policy as well as incentives offered for certain degrees and levels of foreign investment in Australia has made for a property buying frenzy from foreign investors.
• The ever-increasing urbanisation of Australia’s population is resulting in more people moving to capital cities as well as established regional cities also. This in turn adds demand.
• The general ‘FOMO’ effect (fear of missing out) as a result of the above factors adds a heightened sense of urgency to another property-seeking group, mainly upgraders and second or third time property buyers.

All of this of course adds up to high asking prices in many markets. However, initial high buying prices isn’t the only challenge that occupants and residents of these hot markets will face. Different groups will be affected in these hot markets, and in different ways:

First home owners

Despite low interest rates on offer, first home buyers remain consistently out-bid and out-priced within their desired suburbs. The other worrying factor for these buyers is that even if they stretch to their absolute maximum buy rate to secure a property now, they are doing so in a very low interest rate environment.

If first home owners are stretched to their limits now, how they will cope when interest rates fluctuate back up to higher levels over the next 24 months?

I am not of the view that a massive property bubble is forming, however I don’t deny that in low middle income areas where first home buyer volumes are higher, should a significant volume of them fall under mortgage stress over the next couple of years property values in those areas may stagnate for several more years to come.

Australian-based investors

I use the phrase ‘Australian-based’ for this investor group to encompass both Australian citizens who naturalised in this country for most or all of their lives, as well as those who are newer arrivals to Australia but call Australia home (in other words, they live here full-time).

Investors who have purchased residential property in hot markets are no different to those who seek out properties in emerging or undervalued markets; all interested only in the return they get on their investment. This means that providing that either strong capital growth potential, or high rental return, are evidenced in a property purchase, they will consider a property in any market climate – hot or cold.

The problem is hot property markets mean that capital growth for that market/post code is usually at its maximum. That means that for investors seeking immediate capital growth, this will be unlikely for several more years because the property is at its peak right now.

The consequences of suburb specific saturation by investors have not yet been truly seen.

This means that if an investor in a hot market is truly a savvy buyer, versus a poorly-researched, ill-advised wannabe investor, they must be seeking 'hot’ (and immediate) rental return over capital growth.

That  paints an alarming picture for overall housing affordability in these markets. Investor owned properties must be charging very high rents to occupants of their properties right now to ensure their investment isn’t a massive loss-maker for them. That means that not only are property buying rates high in hot areas, but so are rents. Overall affordability to live in these cities  becomes poorer.

Non-Australian and foreign investors

Similar factors exist for foreign investors in comparison to local ones.

However, there is another factor at play. Recent investor profile data research from Australian Property Investor magazine suggests that local investors tend to buy in the same city (if not in a nearby suburb) to where they live. Foreign investors typically purchase, site-unseen, in markets that they have never lived in, nor even (in many instances) have visited.

I guess the missing ingredient here is the ‘sense of community’ that mass-property buying, condensed into a small group of ‘favoured’ suburbs or areas, erodes and the effect this has on an area. Some suburbs can become at risk of being investor ghettos whereby the ratio of owner-occupier to investor-owned property is so high that a genuine sense of community within that area becomes quickly eroded.

Investors should look to emerging markets where owner-occupier to renter ratios are much more balanced.

This then changes the dynamic of that entire area; eroding the gentrification developed over decades, in the space of just a decade or so of heavy investor-buying. Of course, it is not the fault of (nor should the blame be pointed at) the foreign investors themselves; but rather local and state councils, policy-makers and governments whose planning departments allow this occur, as well as property developers who exclusively market to foreign investors from the moment the first block foundation concrete is poured, en-mass. 

I draw a parallel here to post-World War Two Melbourne, where ‘outrage’ existed over the Italians buying out entire suburbs within just a couple of years after the war. The difference however, is that these communities owner-occupied the areas, made a great contribution to the ‘sense of community’ those areas had, and in hindsight were one of the major market driving factors that has given these suburbs the wonderful identity (and desirability) they have today. Yes, some areas were almost entirely ‘foreigner-owned’, but these people became locals and celebrated their communities.

Fast forward to 2014 and there is a lot of uncertainty around the concentrated foreign-investor buyouts of entire suburbs. This is because investors are not living in the suburbs themselves. They do not have say a vested interest in ensuring the local park lands are maintained, or that roads don’t become too congested, or that units and houses are not occupied by too many people, and so on.

It is no doubt clear that hot property markets offer rewards and benefits for some property owners. However, the implications of investor buying extend beyond just bumping the rental and purchase prices up. The consequences of suburb specific saturation by investors have not yet been truly seen. Ever the optimist as I am, I remain doubtful that investors buying in hot areas, at a grand scale, will be a positive thing for those areas.

Investors should look to emerging markets where owner-occupier to renter ratios are much more balanced.