News National ‘Amateur investors’ are raising the risk of housing market collapse: report
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‘Amateur investors’ are raising the risk of housing market collapse: report

home market
Mum-and-dad investors have distorted the market, experts say, forcing up home prices and now likely to make a property market correction much worse. Photo: Getty
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Australia is at growing risk of a home price crash because of the high number of mum and dad property investors, inflated prices, record household debt and an economy that appears to be losing momentum, a new report says.

Local hedge fund Watermark Funds Management has warned conditions in the Australian housing market are similar to countries which experienced property busts after the global financial crisis, including the United States, the United Kingdom, Spain and the Netherlands.

Watermark predicts national home prices are likely to peak in the first half of next year, with prices in Sydney, Perth and Darwin having already fallen amid a crackdown on investor loans by the banking regulator, the Australian Prudential Regulation Authority.

Those price falls indicated that investors were driving the housing market.

The investment firm said the most worrying part of the Australian housing market was the “extreme” level of mum and dad investors in residential property who depend on property prices rising to make a profit.

The proportion of new mortgages taken out by non-professional property investors stands at 35 per cent in Australia — about three times higher than the US, UK and Canada.

The proportion of amateur landlord mortgages in the Sydney market was 42 per cent, which was down from half of all new mortgages in 2015-16.

Aside from the clampdown on investor-lending by the banking regulator, the report said if a Labor government came to power nationally, it may curb tax breaks for property investors, like negative gearing.

“This is a concern to the extent that recent macro-prudential measures and possible future tax changes are being specifically designed to reduce investor activity in the Australian housing market,” the report said.

The fear is that price falls could be exacerbated if more amateur investors sell their properties or demand for investor loans continues to decline.

Watermark said a similar situation occurred in the US before the global financial crisis when the high number of property investors in some cities created a more volatile market.

“The US experience in the ’00s suggests that housing markets with high participation of leveraged speculators tend to exhibit increased volatility in both booms and busts,” the report said.

These ‘investor’ cities had greater than 50 per cent appreciation in the housing boom and a 50 per cent larger correction when the market declined, compared to the US national average.

Author of the report, head of financials investment at Watermark, Hamish Chalmers, said there was the possibility of a sharp drop in home prices in Australia if mum and dad investors ran for the exits.

“Our research highlighted that the Australian economy is exhibiting many similar symptoms that those other economies did before they had their housing-led busts, so things are definitely slowing,” he said.

“What happens next is dependent, and how bad things will be depends on the reaction from the government and regulators.

“It depends on the reaction of the banks themselves and I think crucially, and where Australia is different, is that there is a huge army of amateur investors.”

A survey by Morgan Stanley found that 40 per cent of Australian home loan borrowers intended to sell if house prices were flat or falling, with interest-only loan borrowers three times more likely to sell.

The report said extreme levels of household debt caused downturns to be deeper and more protracted than those entered when debt levels were lower.

Watermark said Australian Bureau of Statistics data over the last 40 years indicated Australian households had increased their mortgage debt each year — a situation which has seen the Reserve Bank voice concerns over the record level of household debt, which is one of the highest in the OECD.

Mr Chalmers said the unprecedented expansion of mortgage-borrowing had been driven by Australia not having a significant economic downturn in more than a quarter of a century.

Citing Macquarie Research, the report said Australian home loan borrowers could borrow more money compared to mortgage borrowers in the UK on the same income.

“We believe that British bankers can recall a recession and house price declines while Australian bankers cannot,” the report said.

“We believe hindsight will reveal Australian banks have simply over-lent to households.”

-ABC