Bricks and mortar: Investors need to remember the property market is cyclical. Photo: Karl Hilzinger
Property investors have been the driving force behind the latest housing boom, leaping at the chance to borrow cheaply and put the money into bricks and mortar. When prices are soaring, as they have been recently, this can seem a sure-fire way of building wealth.
But economics tells us there's likely to come a point at which this strategy becomes a victim of its own success.
It's not clear we're quite there yet. But there are growing signs that conditions are becoming less favourable for housing investors.
When investors buy more houses or flats with the intention of renting them out, or they fund the construction of new homes, it lifts the supply of housing available to tenants.
In turn, this helps to relieve some of the pressures that made the property market an appealing place to invest in the first place. That's because it helps to curb the shortage of homes that had been pushing up prices and rents.
So, what is the evidence this is occuring?
Take rents.The Reserve Bank's latest check-up on the economy reported a general slowing in the rental market. This shouldn't be ignored by would-be landords - rents are property investors' source of income, after all.
Rental inflation had fallen to its slowest pace since the mid 2000s, the Reserve Banksaid. RP Data reports that rents are rising at about 2.6 per cent for houses and slightly more for apartments - which is lower than inflation. Good news for tenants but less so for landlords.
The national vacancy rate, meanwhile, is still below its long-term average but it is gradually creeping up. All up, the effect of higher prices and a softening rental market has been to push down rental yields to abouttheir average for the past decade, the RBA says.
The RBA also says there is a "strong recovery" in dwelling investment under way, as the housing industry responds to a buoyant market and cheap debt. Dwelling construction jumped 5 per cent in the March quarter, helped by new apartments, while the renovation market is also picking up.
And there's probably more home-building to come. The central bank points out that lending to fund future construction is also strong - and first-home-owner grants for newly-built homes jumped 22 per cent in the year to May.
This extra home-building is good for the economy. But it may also take some more heat out of the rental market, notwithstanding the fact a growing population will always need more homes.
So what's the bottom line? All of these trends suggest conditions for property investors will probably not be as buoyant as they have been. Rents are rising more slowly, price growth is also slowing.
This is how you'd expect the market to respond to a shortage of housing and very low interest rates. It doesn't mean we will face a bust like countries where too many homes were built, such as Spain or Ireland.
Rather, the point is that housing moves in cycles of strength and weakness, and investors should not forget this.