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Property investors who bought units in investor-heavy suburbs made a smaller capital gain over the past 16 years than buyers who purchased in areas with more owner-occupiers.
Every $100 invested in the unit market in a suburb with a high proportion of owner-occupiers in 2010 would have risen in value to $199 by this year, new research from Cotality found. But that same $100 invested in a suburb with a high proportion of investor-owners would have risen only to $165 over the same time period.
The research comes as changes to the tax treatment of property investment announced in the recent federal budget prompt some investors to reconsider their plans.
Cotality measured about 3000 suburbs over 16 years and grouped them into four cohorts depending on the proportion of owner-occupiers compared to investor owners in the suburb.
The research found that suburbs with a higher share of owner-occupiers generally recorded stronger capital growth over the long term, and the outcome was most pronounced in the unit market.
Investor-heavy areas can be more sensitive to changes in sentiment, lending conditions and supply, the researchers said, and developers target investor-heavy suburbs to deliver new apartment towers.
Cotality research director Tim Lawless said the apartment sector can have more fluctuations in supply as one new apartment development could add an extra 100 dwellings or more to a suburb.
“There probably is an element of a herd mentality – going with the flow and buying where other investors have already purchased,” he said.
Investors buying for financial returns react more strongly to price signals than owner-occupiers, while investor purchases tend to pick up when dwelling values rise in a suburb, the report said.
But owner-occupiers tend to buy for lifestyle reasons and may be more likely to renovate their home and hold for longer. Owner-occupiers also tend to buy in areas with features such as sought-after public schools or near public transport.
Lawless suggested investors chasing capital growth should put themselves into the mindset of an owner-occupier, and look for factors such as liveability, amenity and public transport, which can drive stronger rates of capital growth.
But he noted the ratio of owner-occupation was only one of the factors investors should consider – a correlation between owner-occupation and capital growth was not necessarily causation.
“Capital gain has always been the main game for investors, especially in markets like Australian housing where yields tend to be extraordinarily low,” he said.
“That is going to be changing over time, especially if negative gearing reforms are here to stay – it does imply investors will probably become more cognisant of opportunities for cashflow or the yield of the suburb.”
PRD chief economist Dr Diaswati Mardiasmo said buyers may find it more competitive to purchase a unit in owner-occupied areas, bidding against families willing to pay to stay in their preferred suburb.
Investors, meanwhile, tend to chase the lowest possible price to support rental returns, even if that means considering a different suburb.
She said investor-heavy areas may have recorded comparatively weaker price growth because of the types of units in the area.
“When it comes to suburbs with a lot of investors, there’s normally a lot of units in that area to start with, and a lot of the time the units are your standard two-bedroom, two-bathroom unit,” she said.
“In owner-occupier suburbs there’s usually a lesser amount of units to start with and the units that are there are not like your tower blocks … usually gentle density units, four storeys, five storeys, where there’s only 15, 20 units in that block.”
The research looked at capital gains from 2010 until this year, and did not forecast the future growth prospects for the unit market. The May federal budget’s changes to the tax treatment of capital gains and negatively geared properties may make some investor-heavy markets less attractive, including where buyers have relied on tax benefits or strong future growth assumptions, Cotality said.
The report said unit suburbs with a high share of investor-owners face the most concentrated risk and are more sensitive to any pullback in investor activity.
Different levels of government have also been trying to improve housing affordability by delivering more supply, including apartments close to public transport.
Lawless said supply typically ran counter to the opportunity for capital gains. Any pick-up in housing supply would be “great news” for housing affordability, “but it does imply less upward pressure on housing prices”, he said.
“You’d have to expect there’s going to be less capital growth in the market because there’s a better balance between those forces.”
