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NEWS - PLANNING
Investment property boom over
7/19/2002
The Reserve Bank of Australia yesterday warned residential property investors that the long-running boom was about to end because of rising vacancies and falling rental yields.
The central bank said the increase in house prices had accelerated in the past year, despite emerging signs of an oversupply in the market.
But it warned that the gains could not continue. House prices around the country have jumped by more than 40 per cent in the past five years, with much of the growth occurring in the past year.
The rises - led by Melbourne, Brisbane, Canberra and Sydney - have coincided with a dramatic boom in medium-density construction, fuelled in part by the Government's first-home owners' grant.
"It would be unlikely that further strong price increases could co-exist with rising vacancy rates and falling rental yields for very long," the RBA said.
Housing Industry Association figures issued yesterday underlined the RBA's concern, showing sales of new dwellings fell by 22 per cent in June, the largest monthly fall in more than a year.
The investment property boom was helped by changes to the capital gains tax regime two years ago, which in effect halved the tax rate on most investment property sales. But a rising interest rate environment this year has made buying investment properties less attractive.
The RBA predicted vacancy rates and yields on medium-density properties - which determine capital returns - would get worse before they got better.
As a result, prices are unlikely to achieve the stellar gains recorded over the past five years, potentially adding to pressure on highly leveraged households already facing rising interest rates.
"Supply of accommodation is increasing and will continue to do so in the year or two ahead with the completion of a large number of recently approved medium-density dwellings," the RBA said in its monthly bulletin.
"Demand on the other hand may have declined at the margin, as owner occupation became more readily attainable as a result of the Commonwealth Additional Grant Scheme."
Loans to investors have grown at twice the rate of loans for owner-occupiers over the past two years, helping to push the vacancy rate on rental properties to about 3.5 per cent, near its highest level since the mid-1990s.
Meanwhile, the gross yield on rental properties - rent as a proportion of the house price - has dropped from about 10 per cent in the mid-1980s to a historic low of less than 4 per cent as owners drop rents to attract tenants.
"In the current environment, prospective yields on rental properties may be lower than those seen to date," the RBA said.
"It would be unlikely that further strong price increases could co-exist with rising vacancy rates and falling rental yields for very long.
"It is more likely that any assumption by investors that future capital gains can be assured will have to undergo some revision."
Over the past five years, housing prices have increased in Melbourne by 70.5 per cent, followed by Brisbane (45.8 per cent), Canberra (34.8 per cent) and Sydney (30.7 per cent).
Adjusted for inflation, the nationwide gains match those achieved during the property boom of the late 1980s.
The RBA believes factors behind the big jump in investment buying include a growing nervousness about sharemarket returns and banks actively seeking housing investors by dropping rates on investment loans to no higher than those for owner-occupiers.
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