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Are we about to see increased property market volatility? 

Are we about to see increased property market volatility? 

Australia is currently witnessing challenging dynamics in the property market, where the costs and complexities associated with owning investment properties often outweigh the potential returns. Are high interest rates, increasing taxes, and rising maintenance expenses making property investment less attractive?

On May 21, here on the blog, we noted the Reserve Bank of Australia (RBA) had indicated conditions for home buyers aren’t likely to improve “anytime soon”, adding the central bank issued a stark warning last week about the ongoing surge in property and rental prices, attributing the issue to a confluence of rising construction costs and higher interest rates, which are significantly impeding the delivery of new housing supply. And you can add development red tape to that list. 

At a recent event in Hobart, RBA’s Chief Economist Sarah Hunter highlighted the persistence of these challenges, describing them as a “perfect storm” that continues to restrain construction activity. “Despite navigating the pandemic’s disruptions, the sector now faces weaker demand, with dwelling approvals per capita at decade-lows,” Hunter noted. She pointed out that many developers are postponing or cancelling projects due to the high construction costs relative to expected returns.” 

It’s a complex problem, and recent trends reveal a growing segment of disillusioned investors and a cohort of distressed homeowners. Two distinct yet interconnected phenomena highlight the mounting challenges faced by both groups: the exodus of property investors amidst rising costs and the surge in mortgage hardship among homeowners. These issues, while stemming from different origins, converge in their impact on the Australian real estate market. 

The exodus of property investors 

While derided in the media, Australia’s Prime Minister, Anthony Albanese, exemplifies a broader trend among property investors: the decision to sell rental properties. Investors increasingly find the combination of higher borrowing rates and new state-based taxes too burdensome to maintain their investment properties. Despite potential benefits like rising rental income, improved capital gains, and negative gearing tax breaks, the financial viability of holding onto rental properties is diminishing. 

Banks charge investors higher borrowing rates than homebuyers, and rental income usually falls short of covering the ongoing costs of a mortgaged property. Consequently, the primary hope for profit lies in capital gains upon sale. However, capital gains can be uncertain, and in some states they have been declining.  

The increasing tax burden further exacerbates the situation. A Property Investment Professionals of Australia (PIPA) report notes a 73 per cent rise in tax revenue from property owners over the past decade, contributing to an exodus of investors, particularly in states like Victoria and New South Wales. But, the exodus is having a surprising consequence: It threatens to worsen the existing shortage of rental properties, as investors provide over 80 per cent of homes for renters. 

The surge in mortgage hardship 

Parallel to the struggles of property investors, homeowners are facing their own set of challenges. A record 16 per cent of property sales early this year were homes that had changed hands less than three years prior, often due to mortgage stress and financial hardship rather than speculative flipping. The Australian Securities and Investments Commission (ASIC) reported a 54 per cent surge in mortgage hardship notices in the final quarter of 2023 compared to the same period in 2022. 

Some homeowners are grappling with a version of the “mortgage cliff,” where borrowers who secured low fixed-rate loans during the pandemic are now transitioning to much higher variable rates. This transition is reported to be resulting in an increasing level financial of strain, with a significant number of borrowers unable to meet their repayment obligations. Overcommitment is the most common reason for hardship, indicating that many Australians were lent more than they could afford, particularly as interest rates have risen. Before blaming the banks entirely, keep in mind the rule change by banking regulator APRA in 2019 that ditched a seven per cent interest rate floor on mortgage serviceability tests for home loan applicants. 

Commonalities and contrasts 

While property investors and homeowners face distinct challenges, their situations share common themes of economic pressure and market instability. Both groups are impacted by rising interest rates and regulatory changes that have made property ownership more difficult. Investors are deterred by the high costs and diminishing returns on rental properties, while homeowners struggle with increasing mortgage payments and financial hardship. 

If ever house prices were going to fall because banks and regulators stuffed up, this would be it. 

A key contrast, however, lies in the response to these challenges. Investors, seeing an opportunity in the current market, are choosing to sell and exit the property market, often benefiting from some capital gains made over the last two or three years. Homeowners, on the other hand, are forced to sell due to financial distress, frequently doing so to avoid foreclosure or bankruptcy.  

The exodus of investors will likely exacerbate the rental property shortage, driving up rents and making housing less affordable for tenants. Meanwhile, the rise in distressed sales among homeowners could lead to increased market volatility, potentially reversing recent gains in property prices. 


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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