A new report has predicted that house price growth will slow dramatically in two capital cities over the next few years, putting significant pressure on investors.
According to Moody’s Investors Service, house price growth in Sydney and Melbourne will decrease to “low-single and mid-single digital levels, respectively”, making it more difficult for struggling borrowers to exit the market via a quick sale or to refinance.
The report also revealed that gross rental yields on Sydney and Melbourne houses are at the lowest levels on record.
Meanwhile, gross rental yields on Sydney and Melbourne apartments are at the lowest levels in 10 years.
“Over the three years ending 31 December 2015, rental yields dropped 30 per cent to 2.3 per cent for Sydney houses, 20 per cent to 2.68 per cent for Melbourne houses, 19 per cent to 3.9 per cent for Sydney apartments and 10 per cent to 3.7 per cent for Melbourne apartments,” the report said.
“At the same time, the average standard variable mortgage interest rate has dropped by only 7 per cent to 5.95 per cent, showing how, ignoring capital gains/losses, the profitability of leveraged residential property investing has declined during this period.
“It is likely that net rental yields would be 10 to 30 per cent less than gross rental yields after costs such as realtors’ fees, property maintenance costs and strata fees for apartments are taken into account, making the cost of investment properties even greater.”
The report also noted that investment loan performance is likely to deteriorate in Sydney and Melbourne throughout 2016 and 2017.
“In particular, investment loans originated in Sydney and Melbourne in 2014 and 2015 – at the peak of the recent house price cycle – will be behind this deterioration and under-perform previous vintages,” the report said.
“The deterioration in the affordability of servicing investment properties has made new residential property investors more vulnerable to a deterioration in either economic conditions or the housing market.
“However, even in the absence of any major economic or housing market shocks, we expect the decrease in affordability to drive 2014 and 2015 investor loan defaults higher than previous vintages.”
According to the report, Sydney house investors require 39.6 per cent of net household income to service their investment properties, while Melbourne house investors require 26.5 per cent – both record highs.
Meanwhile, Sydney apartment investors require 16.7 per cent of net household income to service their property investments – the highest in a decade – while Melbourne apartment investors require 15.5 per cent, also a record high.