2023 property investor market forecast and the impact of 2022
The latest CoreLogic quarterly review of the rental market makes for heady reading, with national dwelling rent rises now in double digits for the first time ever and yields recording the strongest quarterly rise on record from June to September 2022.1
With figures like these, you’d expect investors to be snapping up properties left, right, and centre, but 2022 has had its fair share of challenges, and after an initial uptick in investor activity, the uncertainties of the market have seen investors exercising unexpected caution in the second half of the year.
Let’s take a look at what’s been driving investors this year and what the experts think 2023 has in store the investment market.
The return of property investors in 2022
Until late last year, the pandemic had played an important role in shifting investor interest away from property. With the borders closed and people’s livelihoods threatened by constant lockdowns and high levels of uncertainty, demand for rentals was relatively low.
In addition, the soaring price of housing plus regulatory pressures and government policies implemented over the past decade had increased the costs associated with investing in property, making stocks and softer assets more attractive to many investors.
However, in early 2022, a flood of tenants returned to the market as borders reopened and the rental market started to tighten considerably.
Furthermore, with macroeconomic conditions tipped to worsen, experienced investors began to turn back to hard assets, which are usually considered a safer bet to hedge against inflationary pressures.
By the end of the first quarter, we were seeing investors flocking back into the market, with March data from the Australian Bureau of Statistics (ABS) showing that investor loans were up 48.4% on the previous year’s figures.2
Ebbing interest as interest rates rise
Unfortunately, the flux was not set to last long as the RBA’s efforts to contain spiralling inflation continue to push interest rates up far more quickly than anticipated.
Like many potential owner-occupiers, a large proportion of investors have opted for a more cautious approach. Investor activity has slowed as many hold their breath (and their cash) while they wait for the economy to stabilise before committing to loans they may not be able to service comfortably if rates keep rising for much longer.
The most recent ABS lending indicators reflect this reticence, with investor loans down 15.3% on last year’s figures for the same period.
Possible opportunities for the brave - current conditions
Despite economic uncertainties, current market conditions could present very interesting opportunities for investors.
With vacancy rates at unprecedented lows and demand continuing to soar as migration gets back to full speed, rental properties are showing very healthy short-term returns.
Data from a recent CoreLogic report show that while dwelling values have fallen 4.1% over the past quarter, rental values nationwide have increased by 2.3%.3
The same report shows that in Sydney, the median rent sits at $665, and the current yield is 2.93%. Rental yields on units are outperforming houses (3.61% vs. 2.63%, respectively) as people turn to more affordable, high-density housing options in the face of the current cost of living crisis.
Less competition from other buyers, rising rents, and interest rates that are still relatively low (despite all the squawking from the media) are some of the factors contributing to the potential opportunities for investors in the current market.
What could 2023 hold for property investors?
Interest rates are expected to continue their upwards trajectory, at least in the short term, which means housing values are unlikely to start climbing any time soon. However, once the economic pressures stabilise, capital growth will almost certainly kickstart again, which is good news for the longer term.
In the short term, experts are predicting that vacancy rates will remain extremely low, especially in the capitals, and that rental yields will keep increasing as a result. Combined with lower purchase prices, this could entice more investors back into the market, especially if the RBA’s interest rate increments start to level out a little as expected.
Perhaps it’s worth noting that the increased costs associated with property investment are currently more than compensated for by the huge increases in rental yield. The cash rate has increased by 2.75% while national rental yields, according to the latest CoreLogic Quarterly Rental Review, are up 10%, a trend that looks set to continue as stock levels remain tight and demand high.
Many investors who have been quietly biding their time to see how market conditions unfolded over the year are likely to be tempted back into the market in light of how strongly rental properties are performing in the short term.
In the longer term, the property cycle will continue to turn, and after a period of stabilisation, we will once again see housing values starting to trend upwards. This may not happen in 2023, but property investment is a long-term strategy, and the market is expected to begin its march towards recovery once inflation is brought under control and interest rates stabilise.
Sources
[1]https://images.insight.corelogic.com.au/Web/RpDataPtyLtd/%7Be54372e3-87ed-4bfa-aabf-d38cbd19a6b5%7D_202210_CoreLogic_RentalReview_SepQ_2022.pdf?elqTrackId=5e4b0e8ec7044b73bb784ab50f08699f&elq=73c5289260f742ef8788cd83b389d5d5&elqaid=3675&elqat=1&elqCampaignId=2506&elqcst=272&elqcsid=327 [2]https://www.abs.gov.au/statistics/economy/finance/lending-indicators/mar-2022 [3]https://images.insight.corelogic.com.au/Web/RpDataPtyLtd/%7Be54372e3-87ed-4bfa-aabf-d38cbd19a6b5%7D_202210_CoreLogic_RentalReview_SepQ_2022.pdf?elqTrackId=5e4b0e8ec7044b73bb784ab50f08699f&elq=73c5289260f742ef8788cd83b389d5d5&elqaid=3675&elqat=1&elqCampaignId=2506&elqcst=272&elqcsid=327
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