Cautious property investors waiting for discounts in second half of 2010: Experts

Property investors are unexpectedly backing out of the housing market, with analysts predicting another few months of subdued activity as they wait for more listings to appear in the traditionally strong Spring/Summer season.

The comments come after SQM Research founder Louis Christopher told SmartCompany yesterday he expects sellers to discount prices over the next six months as listings increase and outstrip demand.

The Australian Bureau of Statistics confirmed yesterday the value of loans for investment housing dropped by a seasonally adjusted 3.6% to $7.3 billion from May. There was also a 5% drop in the number of dwelling commitments for the construction of new houses.

This is a far cry from the claims investors would pick up the slack in the market during the second half of the year as first home buyers back away due to the removal of stimulus. Now, it seems, investors are too timid to make a move.

Real Estate Institute of Australia president David Airey says this isn’t surprising. With talk of interest rate rises, low retail sales and the country’s dependence on economic improvement overseas, investors are understandably coy.

“I tend to think it’s seasonal as much as anything, but the constant talk of interest rate rises is definitely off-putting to a lot of people. The biggest factor, however, is bank lending.”

Airey believes banks have tightened their lending positions so much that many investors just simply cannot get loans any more. Equity and servicing requirements have reached such highs that virtually no one can get finance without jumping through hurdles.

“I think probably, in order of priority, the banks have taken the view that the housing market won’t recover quickly and they are very concerned about a bubble. They’ve decided they’ve had enough exposure to that and as such have tightened up their LVRs.”

Maybe so, but Christopher says it’s more that investors see safety in numbers. As buyers move away due to higher interest rates and opt to save their money, investors understandably back off as well.

“Investors are generally momentum operators, in the sense that they will continue to invest or aggressively invest when they see the market turning upwards. When things go down, they tend to back away,” he says.

Christopher believes investors are waiting for a bargain. Yesterday he told SmartCompany listings will increase over the next six month in such high numbers that we’ll even see discounting in a buyer’s market.

“It is still early days, but I do think the May interest rate rise affected the market in a big way. I think investors are still going to wait, and they could be waiting for awhile.”

Airey certainly agrees, saying that he “can’t see the lenders changing their position on this just overnight”.

“Combine this with interest rates appearing to be stabilised in the short-term, I think the summer market will really be the big test.”

However, Westpac senior economist Andrew Hanlan says rates will stay at 4.5% for the next few months and this will give investors the confidence they need.

“We saw the investor upswing take a breather in June, with a 3.6% fall. Even so, lending to investors is up 29% since the start of 2009. Further gains are likely in response to strong rental income growth.”

“We view this as the tail end of current weakness. The RBA has moved to the sidelines and excessive pessimism has been corrected with the Westpac-MI Consumer Sentiment Index rebounding sharply in July to a healthy reading of 113.1.”

CommSec economist Craig James believes the RBA may have acted too rapidly in raising rates, and now says investors are in for a stable market for the time being.

“Day by day, it is looking more likely that the Reserve Bank Board will be sitting on its hands until 2011. Interest rates are back to ‘normal’ but there are good grounds to argue that the normalisation process was a little too quick.”