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Growth Drivers: Investors Or Owner-Occupiers

Growth Drivers: Investors Or Owner-Occupiers
January 12, 2021 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Whether the value of an asset goes up or down, and by how much, is directly determined by the relationship between the number of willing sellers and willing buyers. In other words, the level of competition (or pressure) within a chosen location will dictate property market performance.

On the other hand, the sustainability of a property market’s performance is influenced by the make-up of buyer demographics. A high portion of buyers for owner-occupier purposes makes for greater market stability, whereas if real estate values are driven up by lots of buyers for investment purposes it is more susceptible to future weakness.

A good way to illustrate the difference between an ‘investor-driven’ and an ‘owner-occupier driven’ property market is to dissect two capital cities that both experienced a property boom in recent years, Sydney and Hobart.

Much has been said and written about the property markets of both of these cities. Unfortunately, a lot of it is factually incorrect and / or many opinions are tainted by bias. It leaves the knowledge-craving public with grossly inaccurate beliefs and perceptions.

One of the reasons that Propertyology loves data so much is that it speaks a universal language (aka ‘facts’). The collation and skilful interpretation of lots and lots of facts is the basis for quality decision-making.

Official CoreLogic data confirms that, for both capital growth and rental growth, the Hobart (middle-ring) municipality of Glenorchy blasted every other location out of the water over the 5-years ending October 2020. House prices increased by 69 percent (boom) and the low supply of rental accommodation has also seen rents increase by 37 percent (double-boom).

Over the same period, Sydney’s median house price increased by 6.5 percent, while regional markets like Orange NSW (56 percent), Launceston TAS (45 percent) and Burnie TAS (30 percent) outperformed all capital cities. And check out the rent growth in the chart below. Over the years, Propertyology’s buyer’s agents has enjoyed helping everyday Aussies invest in each of these great locations.

Official economic data confirms that, from 2014 to 2020, Tasmania’s economy went from being the lowest ranked state to Numero Uno.

ABS data also confirms that Tasmanian property markets were driven by a year-after-year increase in owner-occupier activity (the blue line in the chart below).

The green line in the top two diagrams reflects transactions by property investors. Note that investor activity in Tasmania has been flat (much lower than owner-occupier activity) whereas the green line for New South Wales reached all-time record high volumes in 2013-17 (meaning Sydney’s last property boom was largely driven by investor activity).

The bottom half of this chart illustrates how investor activity impacts rental vacancy rates.

Property owners generally do not care what drives asset values up.

The fundamental difference between a property market being driven by either owner-occupiers or investor activity will eventually be the impact on household rents.

At the end of the day, rental supply in any property market is entirely determined by the activity of everyday Aussie property investors. Without them, there is no increase to rental supply and rents will skyrocket.

Governments cannot fund rental accommodation. They do not have enough revenue to fund essential infrastructure like hospitals and transport improvements, the salaries of public servants, and aged pensions.

Whether there is sufficient rental supply within an individual town or city depends entirely on the volume of investment properties purchased.

In Sydney’s case, the record high volume of investors during 2013-17 created a surplus in rental accommodation in the Harbour City. The total volume of vacant rental properties in Sydney progressively increased from 10,000 in mid-2016, to 19,000 in mid-2018, and peaked at 26,000 in December 2019.

The evidence confirms that Sydney’s all-time record high vacancy rate of 3.6 percent occurred in December 2018, well before the arrival of COVID-19, and it has remained elevated since then. Sydney’s current 27,000 vacant dwellings is enough to accommodate a city the size of Launceston (Australia’s oldest regional city).

The rental supply surplus resulted in advertised rents for a 3-bedroom Sydney house falling from its $730 per week in late 2017 to $700 by February 2020, and then to $630 by December 2020.

Conversely, ABS data confirms that only 16 percent of all Tasmanian home loans over the 5-years ending 2017 were to purchase an investment property. This very low investor activity means that insufficient rental supply has been added.

Hobart vacancy rates have been below 2 percent since way back in September 2013, less than 1 percent for all of the last 5-years, and today sit at 0.6 percent.

In a city with 244,000 people, Australia’s 11th largest city only had 175 dwellings advertised for rent at the beginning of the 2021 calendar year. With a supply shortage as extreme as that, throw in demand driven by record-low interest rates and 41 major projects to underpin economic growth, even Blind Freddy can see that could only mean property market growth.

So, while both Sydney and Hobart produced a growth cycle that saw asset values rise strongly, the former was driven by high investor activity and the latter was through owner-occupiers responding to high local confidence.

The moral of the story is that perceptions, especially in Australian real estate, often are not the reality.

It pays to be careful with what one believes, no matter where you read it. Whether an opinion is expressed by a property valuer, an economist, or a buyer’s agent, an opinion that is not supported by evidence is probably just adding to the cesspit of Australian real estate false statements.

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