‘Bye, bye:’ Property investors pack up their bags in droves

This article has been republished from the August edition of the digital magazine.

The question on many landlords' lips remains the same: ‘Do we stick it out or sell to ease the stress?’

The reality is, rising interest rates, legislative red tape, and the cost of debt-eroding rental yields have forced some investors to pack their bags and leave the market.

The number of investors buying dwellings has been falling since early last year. In March 2022, the number of loans secured for investment property purchases peaked at 21,663. As of April 2023, the volume of new investment loans had fallen around 42% to 12,562.

Unfortunately, no one is immune to the current, crazy financial environment.

Your Investment Property surveyed 2,400 YIP Advantage members between 21 April-12 May and found that the number of property investors looking to sell was up 44% over the previous quarter (36% compared to last quarter's result of 25%). More than half of investors said they were looking to offload their property/s within the next six months. While the market is crying out for more investors given low vacancy rates and growing rents, half of respondents are steering away from purchasing another property in the foreseeable future.

Buyer’s Agent Chris Clarke said property investors are leaving the market at what would typically be viewed as a great time to get in.

“Over the last two years we've seen rental prices increase by 20% to 30% and property prices have remained stagnant over that time,” Mr Clarke told Your Investment Property Magazine.

“This means that yield return has increased whilst capital growth has remained stagnant.

“With constant talk of legislation and reforms occurring, including the recent stop to rental bidding in NSW, many investors are holding off on making purchases whilst they assess if legislation is going to continue to be placed in favour of tenants.”

For those that are feeling the pressure financially, offloading an investment property can provide a sense of relief and quite frankly, is a much easier decision than giving up the family home.

Interest rates dampen rental returns

No one is safe from rising interest rates, not even property investors - especially those whose rental returns are falling short of covering mortgage repayments. Those bearing the brunt may have bought investment properties when rates were at record lows and rental payments easily covered costs. But that’s not the case anymore.

Since the start of the rental upswing in September 2020, mortgage payments for new investment mortgages have on average, increased faster than rents, prompting some investors to quit the scene, so to speak.

Using CoreLogic’s national median dwelling value and national median rent as an example, weekly rent values have gone from $455 to $583 between September 2020 and May 2023. Weekly payments on a variable-rate investment loan on the median dwelling value rose from $443 to $830 per week. In this scenario, the difference between weekly rent and a new investment mortgage repayment has gone from $12 at September 2020, to -$247 by May 2023. On average, mortgage costs have risen much faster than rent values due to a record hike in the underlying cash rate, and dwelling values still being quite high relative to where they were in September 2020.

Tristan Larkin from Tomii Buyers Agents said the interest burden has become too high for some investors amid an already high inflationary environment.

“Some investors are starting to feel the pinch of the rising interest rates, especially if they've got two or more properties as this is essentially affecting them twice as much,” Mr Larkin told Your Investment Property Magazine.

“Properties that were positively geared a couple of years ago could be negatively geared today and properties that were slightly negatively geared two years ago could be significantly negatively geared today. That’s the reality.”

Speaking to Your Investment Property Magazine, CaptainFI, a retired international transport pilot from Australia who has his own blog on financial education and independence, said the uncertainty of interest rates has pushed him to consider selling his two duplexes.

“A big focus of mine for investments is being able to create a semi-passive cash flow to fund an early retirement or probably called a semi-retirement as I’ve been running my website business for a little while now,” CaptainFI said.

“The property itself has been a big amount of effort and money (so many hidden fees) and has become a source of stress.

“It’s not that ‘badly’ negatively geared but it’s this constant kicking of the can down the road. Yes, it’s costing money now but it is growing in capital appreciation so it will be worth more tomorrow. But tomorrow is eventually today, right?

“With the risks of more and more rate rises making it cost even more to hold and making the market unsteady and potentially causing the property to lower in value, it might seem like a sensible option to just cut the losses so to speak. Sell the property and walk away with a tidy profit.”

To weather the storm that is the 12 rate rises seen over the last 15 months, there, unfortunately, will be a percentage of landlords who have to sell because they’ve exhausted all means of discretionary income. And given there could be another rate rise or two to come, the final straw may emerge in the near future for some.

Rental reforms are a big ‘no-no’

Tightening regulations and changes to tenancy laws aren’t doing property investors any favours either.

The Your Investment Property survey found more than a third (35.1%) of investors are likely to pack their bags and leave the market due to rental price increases being capped at once per year in Queensland from 1 July 2023.

Limits to rental increases can prevent rental rates from fully reflecting increases in mortgage repayments, which is likely to translate to further losses for investors.

The survey revealed 67% of property investors don’t believe the restriction strikes the right balance between protecting tenants and ensuring a fair return for landlords. A further 62.3% said the Queensland rent limits will reduce their ability to maximise yield from their investments.

But it’s not just Queensland in the firing line. Victoria has also imposed some questionable laws on investors.

Introduced in the Victorian Government’s State Budget, the tax-free threshold for land tax will be reduced from $300,000 to $50,000 and the rate will increase by 0.1% of the value over $300,000. Those who pay land tax will also incur a temporary fixed charge starting at $500 for land worth up to $100,000 in value, while more expensive landholding will incur a $975 fixed fee.

The temporary measure will come into effect from 1 January 2024 and last for the next 10 years.

Mr Larkin said recent conversations with property investors show just ‘how sick they are of Victoria’ and the policies brought in by the government.

“Some property managers have told me directly that they have lost a lot of investors on their books as they can't afford the upkeep of their properties,” he said.

“With the new increase of land tax and the recent addition of the electrical safety rental minimum standard in March 2023, it has become a lot more expensive to hold an investment property, especially if you own multiple in Victoria.”

Cash out now while you can

Mr Larkin said some investors that aren’t necessarily in a spot of financial difficulty are selling as a way to cash out the gains they may have experienced over the last few years.

“If you bought a property five to 10 years ago, it's likely that you have achieved some decent capital gains,” he said.

“Some investors are of the opinion that the market will not rise any more in the short term and would rather sell now so they don't have to experience the higher interest rates and buy back in when interest rates are coming down in the future.”

CoreLogic Head of Research Eliza Owen echoed a similar sentiment.

“A key driver why investors are selling might be capital growth,” Ms Owen said.

“If you look at a city like Perth, where the portion of investment sales surged in mid-2020 and remained high ever since, this may reflect investors finally getting some pay-off after a long period of decline in home values for much of the 2010s.”

The future looks uncertain

Why are investors leaving the market? While the list is endless, it ultimately does come down to individual circumstances. Some properties are losing money, essentially putting strain on family cashflows and leading to portfolio re-evaluation or even panic-selling. An anticipated recession may also have some investors running for the hills alongside rising costs of materials/labour which affects maintenance prices.

There’s not just one ingredient fuelling the fire, there’s a multitude. Tie all that in with rising interest rates and you have investors taking that extra step to saying ‘bye bye' to their property/s.