Australian Property Investors are ‘Copping It’

Over the last year, as we talked to thousands of Australian property investors, one thing became very clear – the current market hasn’t been kind to them. The sense of frustration is palpable, and we can’t say we blame them.

We’ve rounded up our top statistics and reports that illustrate the reasons behind this growing disenchantment and the resulting trend of investors selling their properties.

While the numbers below are a bit grim, they only spell out very clearly why so many clients and investors come to us seeking alternatives for cash–flow positive property investments.

The Rising Tide of Investor Discontent

A recent survey by the Property Investment Professionals of Australia (PIPA) found that 19.2% of investors were considering selling in 2023, a significant increase from previous years, and 12% of them actually followed through with their intent.

What is even worse is that a staggering 38% of investors have responded that they are considering selling a property over the coming year.

An Exodus of Rental Properties

CoreLogic reported last year that investor-owned properties now account for 32.7% of all residential listings, up by more than 7% on the decade average.

As the investors are selling, their properties are being purchased by existing homeowners (43.1%) and first-home buyers (30.3%), rather than other investors. When you consider the recent Census data from 2021, which recorded 2.478 million rental dwellings in Australia, this suggests that in the last year alone, close to 220,000 rental properties were sold, predominantly to non-investors.

This shift is causing a reduction in rental stock, exacerbating the pressure on the rental market, that is already in crisis.

Most of the survey respondents said their reason for selling is dissatisfaction with including restrictive legislative reforms, increasing taxes, and duties, and overall, investors are bearing more costs than benefits.

Source:  PIPA Annual Investor Sentiment Survey 2023

“Investors are increasingly finding the current market conditions unviable,” says Chad Egan, CEO of GPFG, “To put it bluntly, the Australian property investors are copping it, and quite brutally. With the legislative environment tilting towards tenants and yields not keeping up with costs, it’s no wonder many are choosing to exit the market.”

Diminishing Rental Yields

High demand for rental properties would typically mean positive news for investors and landlords. However, this is not the case. While housing prices and rents have soared and vacancy rates are at record lows, rental yields have not kept pace. Annual rent increases above 10% occurred in 2022 and 2023, while costs for purchasing, borrowing, and holding have left rental yields stagnant at around 4% nationwide.

An astounding majority (57.6%) of investors report their portfolio as negatively geared, a sharp increase from 30% in 2022.

Skyrocketing Mortgage Interest Payments

Property investors are certainly not immune to rising interest rates. Investors who bought properties during periods of low interest rates are now facing the reality of increased mortgage payments, often exceeding rental income. Mortgage interest rates and payments nearly doubled, with ABS reporting a 91.6% annual increase in June of last year.

Source: ABS Selected Living Cost Indexes

For a dollar comparison, consider this data from CoreLogic: The difference between weekly rent and a new investment mortgage repayment was $12 in September 2020. That has dropped drastically to -$247 as of May 2023.

“Australians love property investment. It’s a primary source of building wealth and saving for retirement,” says Egan. “But if an investment is costing more than it’s earning, then many investors are asking themselves “Is it really worth it?”

Rising Costs Are All Around

Mortgage interest was only one source of higher costs facing Australians last year, with additional wallet hits coming from housing utilities & maintenance (+9.1%), food and non-alcoholic beverages (+4.9%), and recreation and culture (+5.5%). All in all, the ABS reported a 9.0% annual rise in living costs for employee households.

Anyone thinking that property investors have a softer landing when it comes to inflation, you’d be wrong. Most Australian property investors are not high-income earners. About 68% of investors own a single property, and two-thirds earn $100,000 or less. The most common investors are everyday workers like nurses, accountants, and teachers. This demographic has used property investment as a way to supplement their income and add to their retirement nest eggs.

Cashing Out of Australia… and Cashing in Overseas

One reason that investors may be choosing to sell is that they are simply cashing in on capital growth. With housing prices hitting record highs, investors and, especially those who are closer to retirement, are happy to collect their capital gains and exit the market now.

But as investors exit the market, those are some who are turning their sights beyond the borders to overseas property markets, where tourism numbers and rising property values are paving roads for positive returns.

“What we are seeing is a shift out of the Australian market into overseas markets like Bali, where returns are higher with lower price points and fewer costs,” says Egan. Surging tourist arrivals in Bali have granted investors with steady occupancy and regular passive income.

“Not only that, tax benefits are exactly the same, and our partner developers pay interest during construction. So cash flow coming back is almost immediate, which is a nice bonus for anyone wanting a second income to offset inflation.”

Looking Ahead into 2024

The Australian property market is at a crossroads, with investors reevaluating their positions due to mounting financial pressures and legislative changes. This exodus of investors from the market is reshaping the landscape of property ownership and rentals in Australia and leading many to look elsewhere for lower costs and better returns.

“It’s a tough time to be a property investor in Australia. The current market dynamics are forcing many to reconsider their investment strategies, and we at GPFG are happy to present a number of options, such as fractional property investment and SMSF purchases,” says Egan.

For more information on how we can help with cash-flow positive investment solutions, contact the GPFG team today.