Australia’s housing market sits atop a pile of increasingly vulnerable debt, according to Citi researchers, who outlined how the glory days for multiple property investors and interest-only borrowers could soon become a nightmare.
Highly leveraged multiple-property investors are at the centre of the report, with 12 per cent of Australian real estate investors said to own six or more properties, according to new data cited by Citi analysts – a “surprisingly high level of speculation”.
“Tighter lending criteria and rising house prices has meant investors increasingly face net negative cash flows,” analysts led by Craig Williams said.
“Additionally some suburbs, such as Sydney’s Bankstown, have seen investors create extreme, Hong Kong-level house price to income dynamics, reducing the pool of available buyers in these suburbs.”
Many economists believe the Reserve Bank of Australia will begin raising interest rates from record-low levels as soon as mid-next year.
This means those heavily-geared speculators in Sydney and Melbourne markets could be forced to sell as their debt becomes more expensive.
“Historically investors ‘sit tight’, but this has become increasingly less viable,” Citi said, adding investors face a growing household “cashflow gap” and reducing capital gains expectations. “Tighter application of responsible lending laws means that investors must now have a clear debt repayment plan. Although for many prevailing interest-only borrowers this does not exist.
“The large levels of debt outstanding by borrowers aged in their 50s and 60s means many investors will need to sell property to discharge their debts.”
But the explosion of investor and interest-only lending has also increased the exposure of owner-occupiers to rate rises, according to Citi.
“The proliferation of multi-property investment households has also driven a rise in interest only finance utilisation by owner-occupied borrowers,” Mr Williams and his team said.
UBS analysts have been calling the top of the Australian house price boom since April, with economists Scott Haslem and George Tharenou saying the Reserve Bank has been dropped into a difficult situation.
“Given the cash rate is already at a record low, and the prospect that the RBA attempts to start normalising rates by end of 2018.
“It seems unlikely commencements would rebound, and hence dwelling investment could keep falling in 2019,” UBS said. “This makes for a difficult policy position for the RBA. If they hike too early/too much, it could turn a ‘normal’ housing correction into a slump.”