Property investors seem to be more sensitive to rate hikes than owner-occupiers and the recent lending data sets from the Australian Bureau of Statistics prove this.
In July 2022, the value of new housing loan commitments for investors went down by 11.2%, sharper than the 7% drop among owner-occupiers. Investor borrowing activity in July was the weakest in over a year.
The Reserve Bank of Australia made its third rate hike in July, bringing the cash rate from the historic low of 0.1% to 1.35% in just three months. Since then, the central bank increased the cash rate two more times, pushing it to its current level at 2.35%.
CoreLogic head of research Eliza Owen said subsequent homebuyers are less sensitive to the hike in rates due to circumstances that make them likely to take out less debt.
“Using the sale of an existing home to fund their next home purchase, subsequent home buyers would likely need to take out less debt than first-home buyers, thus being less affected by rate rises,” she said.
“Investors are likely to be more sensitive to a lift in rate rises — although investors can offset the expense of higher interest rate payments as a tax deduction, investors are typically more leveraged than owner occupiers, and have inherently higher mortgage rates.”
However, the movement in house prices is another thing to consider when looking at market dynamics.
Ms Owen said first-home buyers usually have a leg up during downturn given the slump in prices coupled with government incentives.
“The main difference between the buyer types over historic downswings is that first-home buyer demand for finance has traditionally been more resilient through downswings,” she said.
“On the other hand, subsequent homebuyers and investors have seen a more distinct decline in demand for housing finance initially through downswings.”
Will investor demand pick up amid rate hikes?
Ms Owen said investor demand is more likely to pick up longer term, given the uncertainty as to when the cash rate would reach its ceiling in the current cycle.
“For investors, we would expect demand to pick up longer term when there is more certainty around the trajectory of mortgage rates and price declines start to flatten out,” she said.
“This is because rental market conditions remain strong, with more rental demand expected as overseas migration returns. Gross rental yields are trending higher as rents rise in most cities while housing values trend lower.”
As for the first-home buyers, the current downturn seems to be shaping up a little differently given that it has largely been due to the increase in mortgage rates that hampered affordability.
Still, Ms Owen said demand from first-home buyers could increase if the governments roll out additional support and incentives.
“Though there are ongoing schemes available such as the ‘Help to Buy’ program and the ‘First Home Guarantee’, these schemes are unlikely to create the rush in first homebuyer demand that temporary schemes have done in the past,” she said, adding that these programs have limitations on places and income.
As for the subsequent buyers, Ms Owen said they will continue to dominate the purchase market.
“Historically, subsequent buyers have accounted for around 48% of monthly borrowing for home purchases, and over the short term could make up a greater-than-usual share of transactions as first-home buyer and investor demand is more sensitive to increased mortgage rates,” she said.
“But even this relatively resilient buyer segment is likely to see a gradual decline in activity, as long as interest rates are rising."
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Photo by Andrea Piacquadio from Pexels.
