The house price recovery could be stopped in its tracks by the growing number of property investors selling up to raise cash and escape from “mortgage prison” as repayments soar.
The finding, contained in research by investment bank Jarden, comes amid an unusual winter surge in auction numbers that has perplexed some real estate analysts.
Jarden says investor listings as a share of all listings hit a record high of 40 per cent in Sydney in June, while investors made up 36 per cent of listings in Melbourne, just shy of that city’s record. A year ago, investor listings comprised about 30 per cent of total in the two biggest cities.
Property analytics company CoreLogic expects 1796 auctions across the country this week, a 17 per cent increase on last week at a time of the year when auction volumes generally fall.
In Melbourne, 689 homes are expected to go under the hammer, up 6 per cent on last week, while 172 dwellings are expected to go to auction in Brisbane. In Sydney, 736 auctions are expected this week, up 9 per cent on the same time last year.
Volumes are expected to be even higher next week, based on an early count of scheduled sales, CoreLogic research analyst Duane Kaak said.
“A further rise in the volume of auctions runs counter to the seasonal trend which is normally characterised by flat to falling auction volumes,” he said.
Jarden chief economist Carlos Cacho said the rise in volumes was being caused by an increasing number of investors listing properties for sale after the Reserve Bank of Australia raised the cash rate from 0.1 per cent to 4.1 per cent since May last year.
“Given the lack of stock on market has been a key driver of recent housing price strength, this increase in supply, if sustained, could be a catalyst for renewed house price weakness,” he said.
An increase in “forced” investor sales could be behind the recent increase in the number of properties selling at a loss and selling within two years of purchase, Mr Cacho said.
CoreLogic’s March quarter Pain and Gain report showed loss-making sales on properties bought less than two years ago were 12.4 per cent of all loss-making sales, up from just 3.4 per cent in March 2022.
“This is unusual given hold periods generally increase during a downturn, but may suggest some sellers are willing to take a loss on sale to avoid higher repayments and potentially move other loans to more attractive rates,” Mr Cacho said.
PropTrack economist Angus Moore said the outlook for property prices would ultimately depend on what happened with interest rates. Markets are fully priced for the cash rate to increase to 4.35 per cent by October from its current 4.1 per cent.
“Home prices have held up surprisingly well this year against the sharp increase in mortgage rates, and it looks like the peak in the cash rate is not far off,” Mr Moore said.
“But if inflation proves to be more persistent than the RBA is expecting, we will see higher interest rates, and that would be a headwind to prices.”
Mr Cacho said investors were selling properties to reduce leverage and improve cashflow, as the fastest interest rate tightening cycle in a generation made it increasingly difficult for them to service multiple loans.
The RBA estimates 16 per cent of households with a home loan are in “mortgage prison”, meaning they are unable to refinance to a lower rate because they would not pass a bank serviceability assessment.
“Despite surging rents and near record low vacancies, interest costs have risen well above rental yields putting pressure on investor cashflow, while reduced borrowing capacity has locked some investors into more expensive non-bank lenders – where rates can be 1 per cent to 2 per cent above major banks,” Mr Cacho said.
With the cash rate at 4.1 per cent, an investor with a $500,000 loan is paying $1134 a month more on their mortgage than they were in May 2022, representing a 49 per cent increase, according to RateCity.
For an investor with a $750,000 loan, that figure is $1701. Borrowers with a $1 million mortgage are paying $2269 a month extra.
While listings have increased, Mr Moore said they still hadn’t reached the levels reached in 2021.
“It’s important to remember that that pickup is happening in an environment of overall slower housing market activity,” Mr Moore said.
“So while the share has picked up, the number of investors selling today is still lower than what we were seeing during spring 2021 or even early 2022.”
Mr Moore said high interest rates had made the prospect of holding on to real estate unattractive for some investors.
“While rents have been growing very quickly, rebuilding gross rental yields, the increase in mortgage rates we’ve seen over the past year and a bit has been much sharper.”
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