The month in review: Regional VIC
By Herron Todd White
Investors represent approximately 30% of the market for Horsham residential real estate. The recent changes to lending practices by major banks has seen the level of interest and demand in this sector of the market decline over recent months. Investors in the Horsham market tend to be mainly local buyers who live and work within the region. Typically, the first home buyer and investor market segments are much the same with the majority of investment properties in Horsham in the sub $300,000 price range. Recent changes to LVR’s and rental return requirements have not only knocked some investors out of the market but softened the demand within this market segment, caused largely by the increased equity and servicing components required for loans. Coupled with the current dry season for the local farming industry the value of housing in this sub $300,000 bracket is expected to stabilize after many months of positive growth.
Investors have traditionally made up a considerable portion of buyers in the Mildura region. In the main, they have been buying modern stand alone dwellings in the $250,000 to $350,000 price bracket.
Demand from local investors has been relatively stable during the past few years, while demand from out of town buyers was higher than normal during the period from around 2010 to early 2015, boosted by the activity of several promoters who were selling house and land packages, often at prices not supported by local evidence.
Demand from out of town buyers appears to have slowed during 2015, partly affected by a strengthening in land prices and a resulting shortage of affordable land. It is also possible that this pool of buyers has reduced, due to the slowing economy in the resource states.
We expect local investors to remain active, despite some tightening in lending criteria and concerns that interest rates may rise.
Homes that are attractive to investors typically contain 3- or 4-bedrooms and are less than 20 years old, thereby providing depreciation allowances and less maintenance issues. Low vacancy rates have contributed to rents for this type of property increasing by around $20 per week in the past two to three years. This has helped keep gross yields between 5.5% and 6%. Yields for small units are higher, however these traditionally have shown less capital gain.
Investors in the Ballarat residential market have been increasingly active over the past five years to the extent they would now make up around 20% to 30% of the residential market in the price bracket from $100,000 to $300,000.
The demographic of the typical investor in the area would be anything from locals over 30 years old with a home and some disposable income to invest, to baby boomers from Melbourne and other capital cities.
They are however all attracted to the market by the same three property investment pillars of affordability, capital growth and rental returns. As the Melbourne market bounded ahead over the past three years with record low interest rates, many investment properties have become out of the price range of many investors. Additionally, the capital growth has decreased the gross yields from the same properties to less than 4% in most cases. This has left many investors searching farther and wider for more affordable properties that deliver a more palatable rental return, closer to 6%, with the opportunity for capital growth.
We are of the opinion that the activity in the investor market at present is sustainable in the medium term, particularly in the established and period housing markets. This is primarily due to the affordability of the properties which occupy this segment and the nature of the people purchasing them.
As an example of the impact if banks raise investment loan rates, we note that an investor purchasing a $250,000 Edwardian dwelling in Golden Point with a loan to value ratio of 80% would see an increase in monthly repayments of around $30 per month. This would not discourage an investor.
However in the event lending criteria tightened in such a way that a more conservative loan to value ratio of say 70% was required, an impact would be felt in the market as prospective investors would be required to compile a greater deposit to enter the market.
If investor demand dissipated we would see an increase in selling periods initially which would be followed by a softening in capital values. The sectors hardest hit would be those where there is already a strong supply verging on an over supply. In Ballarat this section of the market is new villa units and townhouses.
The markets of Ninety Mile Beach, Wellington, Loch Sport, Paradise Beach, Golden Beach, The Honeysuckles and Seaspray remain quiet. There is more interest in established improved properties over vacant land as the Bushfire Management Overlay has added costs to new dwellings. The Loch Sport sewerage scheme is about 30% completed. Initial cost is $800 for a collection tank. Future development will attract a connection fees of about $10,000 (in lieu of the cost of an onsite envirosep system). This has not influenced vacant land sales which remain in the $40,000 to $60,000 range without water views. Values of residential properties are similar for all five towns. Values have been static for several years now. The price of an average quality dwelling in good condition without views is in the range $170,000 to $220,000, above average is greater than $220,000.
Investor activity in East Gippsland remains low with low interest rates and reasonably good rental returns not seeming to stimulate the market. The best returns are found in the lower brackets, say the $200,000 to $275,000 range, where gross yields are in the 6% to 7% range. Yields are lower for higher value ranges where for a $350,000 investment, 5% would be typical. Agents are reporting only a few recent enquiries from investors looking to buy.