'The property investment party is over'

Jun 12, 2020

Like many landlords, Cleo Glyde always believed property investing was a reliable way to make money – it's stable, simple and it comes with hefty tax breaks. Now she's not so sure.

"It's a lot harder to make property investing work in this environment," she said.

"Rents are dropping and it's a renters' market so there's a high level of insecurity around keeping my tenants at the moment. I'm too worried about spooking them with rental and maintenance issues, that I'd end up with an empty property, which would really hurt my cash flow situation.

"So if times were normal, I would like to sell my two investment properties because they're probably never going to have massive capital growth anyway, given the current market."

For Daniel Pain, who was recently furloughed from his job at an oil and gas company, the property game is over.

After investing for 12 years, he decided to call it quits and sell up.

"The company has paused just about every project in Australia so I'm on JobKeeper at the moment. I'm not sure when normal work returns and I don't want to have the additional worry of having a large debt hanging over my head," he said.

"By selling my rental property in Chipping Norton, I'd be able to reduce my mortgage to a more manageable and less stressful level.

"The rents were not covering the costs and capital gains have been slow coming.

"There's so much uncertainty at the moment so it's probably not worth the risk holding on to my rental property."

Triple whammy for investors

The triple whammy of falling rents, rising vacancies and low capital growth is driving many property investors to bail out.

The number of landlords who are liquidating their rental assets rose to 12 per cent from 8 per cent in April, said Martin North, director of Digital Finance Analytics.

An estimated 90,830 investors dropped out of the market during the past 12 months, reducing the total to 2.34 million, Mr North said.

At the market's peak in 2017 and 2018, the number of landlords surged by 8.9 per cent to 2.39 million.

"Investors are selling up because financial stress is rising, with two out three landlords not seeing a positive return on their investment," Mr North said.

"I think the investor party is well and truly over for now."

No tax relief

Tax expert Adrian Raftery estimates that a typical Sydney investor is currently losing $6,543 in rent each year.

"Tax rebates for negative gearing may help but the average tax rate is about 25 per cent, so for every $4 forgone in rent, the tax benefit is just $1. The net loss is a real hit – especially for retirees who rely on that rental income to survive," he said.

"As we have seen in previous market slumps, one bad year in the property market takes a good four or five years to recover from, so current investors will need to have that long-term investment view and ride the short-term bumps."

Downward pressure on prices mount

CoreLogic analyst Eliza Owen said the withdrawal of investors from housing markets may put downward pressure on prices for investment-grade stock like apartments.

Investors represent around 26 per cent of the market, so a drop in activity will affect prices, SQM Research managing director Louis Christopher said.

"Investors are a significant component of the market so when investor activity falls, a significant drop in property prices follows," he said.

"If investors were to leave the market en masse, this will put further downward pressure on already falling prices because you're taking out a large chunk of demand from the market."

Mr Christopher said this was already evident by falling auction clearance rates.

Over the past two weeks, homes cleared at auction dropped to around 40 per cent of properties listed in Sydney and Melbourne after the initial bounce in mid-May, signalling falls in prices, Mr Christopher said.

Original article published here on 12 June 2020 by The Australian Financial Review.

 

 

 

 

 

 

 

 

 

 

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