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What is Driving Investor Demand For House and Land in Victoria and Can It Continue?
Investors continue to make a strong return to Melbourne’s house and land market, with nearly one in three purchasers in April identifying as an investor.
Oliver Hume data shows that in January this year, over 13% of land purchases were made by investors. By April, this had increased to almost 32%, an increase of nearly 250% in just four months.
Source: Oliver Hume Research.
The story of investor participation in the Melbourne new home market over the last five years has been dominated by the response and recovery from the credit squeeze that engulfed the market throughout 2018 and 2019.
During the boom years from about 2014 through to a peak in 2017, investor activity was a key driving force behind increase demand and the massive price increases we experienced during that period.
The lending sector’s response to the Hayne Royal Commission sapped all momentum out of the market for two years and it wasn’t until early 2020 that we started to see increased levels of investor activity.
Just as it was building momentum the recovery was stalled by COVID-19 and, during the worst of the pandemic and Melbourne's extended lockdowns, investors made up less than one in five buyers.
Source: Oliver Hume Research.
But 2021 is a whole different story.
We believe four key factors are driving high demand from investors:
- Low interest rates. Investors love cheap money. From 2018 to 2020 when they retreated from the market, the problem was access to credit, not the cost of credit. With banks now actively promoting investor loans, investors are more than happy to take them up.
- The rise of the regions. Regional markets around Victoria – particularly the Geelong, Ballarat and Baw Baw municipalities – have experienced unprecedented activity over the last six months as workers embrace the work from a home ethos that was triggered by lockdowns. Low entry prices and rising rental yields provide a very attractive picture for many investors.
Source: Oliver Hume Research. Sold Lots.
- Rising Prices – After a period of relatively benign capital growth, prices are now beginning to break out, providing investors with the golden double of strong yields and capital growth.
- Economic Optimism – The most recent lockdown aside, Victorians and Australians are far more optimistic about the future than they have been for some years. The stimulatory effect of massive spending by Governments at all levels is creating high levels of consumer confidence, which is reflected in investors’ confidence.
We see these conditions persisting for at least the short to medium term as the domestic and global economies emerge from the pandemic and the number of people vaccinated continues to rise.
While the growth we have seen in the first four months of the year is likely to moderate, there is little reason to expect investment activity to decline throughout the balance of 2021. We would be very surprised if by the end of the year, one in four buyers in the Victorian house and land market, wasn't an investor.
That being said, there are headwinds that both developers and investors should be wary of.
- New taxes – The State Government has made it clear it has no qualms about stinging the property sector to help prop up the budget. Increases in land tax and stamp duty, along with a new tax on property investment and development announced in the recent Budget, have the potential to take some of the wind out of the State’s economic sails.
- Inflation – While it hasn’t been an issue in Australia, or the rest of the world for that matter, for many years, the threat of inflation is always lurking in the shadows of an economic expansion. With inflation comes the implied threat of higher interest rates. Any increase in the cost of credit would put a dent in investor demand, particularly if the RBA is forced into an ongoing cycle of rate increases.
- Immigration – Australia’s recent economic success has relied heavily on population growth which has been largely sourced from immigration. While borders remain shut, we are almost entirely dependent on domestic demand. This will only take us so far and, eventually, we will need to dismantle “Fortress Australia”.
- Demographics – The long-term impact of changes to work and society as a result of the pandemic are largely unknown. Will the CBD ever recover? Will bosses be happy for their employees to work from home forever? Will the migration to the regions become permanent? Only time will tell what COVID normal looks like.
While there remains much uncertainty about the future, we are optimistic that the next 12 months will provide more opportunity than the last 12 months. There is light at the end of the tunnel and investors will always walk towards the light.
By Julian Coppini, Chief Executive Officer Project Marketing, Oliver Hume