After being out-bid by property investors, many first-home buyers are adopting an “if you can’t beat them, join them” strategy.
Buying a first home as a landlord is growing in popularity, banks say, and that’s supported by survey data from consultancy Digital Finance Analytics, used in this week’s graph.
Buying as an investor, rather than someone planning to live in the home, can certainly make property ownership more achievable.
It means you collect rent to help cover the mortgage, while also being able to claim a tax deduction on your interest costs, something owner-occupiers can’t do.
But despite these advantages – which mortgage brokers and others with a vested interest can be quick to highlight – it’s important to also be aware of the risks.
Banks argue that lending money to property investors is no riskier than lending to owner-occupiers, and their experience in recent decades supports this. However, financial regulators aren’t so sure.
Across the Tasman, the Reserve Bank of New Zealand is grappling with an even bigger property bonanza than Australia’s, and it is looking closely at how different types of borrowers fare in a severe housing bust.
A recent Reserve Bank RBNZ paper said evidence from Australia was limited because we had not suffered a severe downturn in such a long time – so it looked at Ireland, where a monster housing bubble burst during the global financial crisis.
It concluded that investor borrowers were no more likely to default when the economy was travelling well, but they were much more vulnerable in a property crash. Irish investors were about twice as likely to fall behind on their home loans than owner-occupiers during the GFC.
One reason investors are at greater risk is because they are not only betting on keeping their own job, they are also punting on the rental market, by assuming they will be able to rent the home at a certain price, and factoring this into their calculations. In central bank speak, investor borrowers face “additional income volatility”.
That’s not a problem when rental markets are tight, but it can be if the market cools down, as it is likely to.
The other risk is that investor buying is more likely to be speculative – driven by bets on future capital gains.
While it is their job to worry about these things, central bankers caution that speculative price rises are more likely to end in sharper falls, and this was the experience overseas.
The message for first-home buyers thinking about becoming investors is to be aware of these risks, as well as the benefits, of buying as a landlord. That means you should think about how you’d fare if the rental market slowed down; be prepared for interest rates rising; and don’t assume prices can only go up.