Property Investors Hit Hard by Falling Prices and Tighter Credit

Gino FarinaProperty Investors

Investors are big players in Australia’s property market, representing about 42 per cent of total mortgage demand. In the days of the property boom, they reigned supreme with their superior purchasing power. They had willing banks and favourable tax laws working for them, increasing property prices and capital gains.

However, the banks’ tighter lending policies in the wake of the regulator crackdown and royal commission, are making it very difficult for investors to borrow money. According to property research firm CoreLogic, the other big risk to investors is falling property prices. The combination of weakening rental yields and market oversupply, could lead to further falls if demand softens. It seems that the times have changed for investors… for now.

The Impact of Policy Changes from Coalition and Labor

The Coalition Government has already made depreciation allowances less generous so that many investors are getting smaller tax deductions.

Investors are also preparing for a possible change in government, with Labor proposing to wind back negative gearing and the capital gains tax discount, although current owners will keep their tax benefits.

The Coalition is arguing that the proposals will trigger a property market collapse, but Labor maintains its policies will stimulate investment in new dwellings and help first home buyers enter the market.

Investors Advised to Hang in There

The fear is that the combined impact of falling property prices, softer rents, a lending crackdown, and unfavourable tax changes might turn investors into forced sellers or trigger a mass exodus from the market. For the short term, there are likely to be fewer property investors at auctions or negotiating property for sale.

Some investors who bought properties at the top of the market may fall victim to the banks’ tougher approach to lending. However, due to the high transaction costs, many investors are in it for the long term.

While the next year or two might not be the years to invest in property, consolidating what you currently own could be key. CoreLogic’s head of research, Tim Lawless, has said: “In any sort of downturn, you would generally see investors riding it out looking for that long-term capital gain and hopefully trying to improve their yield as they pay down their principal.”