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Investors rethink property amid east coast price dive

Glenn Freeman  |  25 Jan 2019Text size  Decrease  Increase  |  
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Tumbling house prices may be forcing investors to question the merits of property investment versus other asset classes such as shares and bonds. 

Lending to property investors last year fell to its lowest level since records began in the mid-1980s, Reserve Bank of Australia data shows.

And in response to forecast price falls of up to 25 per cent in Sydney and Melbourne, investor concern may be rising, says Steven Korner, a financial adviser with Omniwealth.
Korner cites the recent example of a client who was weighing the option of buying a property versus buying a portfolio of shares and credit assets.

"They were saying 'we went to buy a home, but property is decreasing in value, would we be better off looking at shares'," he says.

But Korner warns that swapping from property to shares isn't a reliable way to mitigate losses. Property and listed assets have different characteristics, but they are still linked to overall economic conditions, he says.

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Property prices in Sydney and Melbourne are tipped to fall by up to 25 per cent

Korner says Omniwealth's property research division hasn't recommended any property investments in NSW in recent years.

"When prices are increasing, people are feeling good and they spend more money. Now people are starting to feel like they're losing money [on their property value], they're spending less money and they're more afraid of buying property," he says.

"But what's the long-term plan? That's what is important."

This is a view shared by Morningstar's head of equities research, Peter Warnes.
“Over time, housing prices keep rising over the long term, but so do equities. I don’t think it’s a race to the top,” Warnes says, suggesting that a diversified portfolio should have “a bit in each camp”.

Credit growth slides

Monthly investor credit growth of 0.1 per cent for December continues a downward trend that stretches back to mid-2017 – a worrying if unsurprising reaction to regulations and consumer sentiment.

This environment is largely the result of tighter lending criteria from banks, which have been driven by rules imposed by the watchdog, the Australian Prudential Regulation Authority.

"It's concerning to see investment retract … but it's what you'd expect in the tougher credit environment," says Geordan Murray, senior economist, Housing Industry Association.

Murray says there's evidence that banks are going above and beyond what's required by APRA.

“It’s probably in response to the banking royal commission, prompting them to look at all aspects of their businesses to make sure they are operating as they should," he says.

Murray also points to the ongoing effect of the regulator's restrictions on interest-only lending, which were introduced in March last year, before being repealed in December 2018.

Under these measures, banks were required to limit interest-only loans to 30 per cent of their total loan books – in addition to a 10 per cent annual growth cap on lending to property investors.

Interest only loans are widely used by property investors to benefit from negative gearing tax concessions.

The recent relaxing of these curbs should alleviate some of the issues accessing credit, says Murray, but will take some time to be reflected in the data.

 

is senior editor for Morningstar Australia

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