Colliers’ Residential Customer Series Report highlights the critical role of nurturing investors in supporting housing supply, say Diana Sarcasmo Colliers Managing Director.
Colliers’ Residential Customer Series Report was released, highlighting the critical role of nurturing investors in supporting housing supply, diversity and options for occupancy.
The requirement for new housing supply at a national level is strongly recognised with government and industry seeking means to address this shortage. The delivery of new housing supply will support the changing needs of today’s population through their respective life-cycles.
This comes at a much-needed time wealth, when 56% of household wealth is held in residential property, which includes investment from many superfunds. Moreover, residential real estate is fundamental to Australia, totalling $10.8 trillion as of July 2024.
“Addressing current issues, particularly around housing supply, requires a national level response given its fundamental importance to the broader population. Investors overall have played a prominent role in the supply of apartment stock and critical rental stock, accounting for between 55-66% of occupied apartment stock as at 2021 (with the potential to have been higher across some markets due to COVID),” Diana Sarcasmo, Managing Director | Residential at Colliers said.
“Since the onset of the pandemic however, new project launches have started to reduce, creating a challenging environment for investors to participate in. Additionally, recent impacts of increased construction and funding costs have also created further complications in delivering much needed supply to the market. Therefore, to increase available rental stock, it is crucial to attract investors back into the market.
The current housing crisis and ongoing undersupply dominates the headlines. While the government and businesses are working to increase supply, individual investors also play a crucial role in addressing this issue. To encourage their participation, the government needs to explore ways to stimulate individual investors back into the market.”
Population growth and its effect on supply
In the Report, Colliers highlights that a growing population has been a major driver of the Australian story over many decades. Population growth has, and will be, supported by net overseas migration, which primarily comprise renter cohorts during their initial years of migration.
Migration is necessary for a positive impact on the economy, as skilled migrants encourage greater workforce participation and contribute more to tax revenue than they claim in social services or other government support. Additionally, tertiary students support education as a major national export.
Following this considerable growth and the undersupply of housing over the last decade, the government recognised the increasing importance of providing housing for the evolving local market and implemented the National Housing Accord target. Initially requiring 1 million homes built over 5 years, it was later increased to an incentivised target of 1.2 million dwellings (240,000 p.a.).
Colliers states that while all forms of new supply will be in demand, higher density and infill stock has been highlighted as a key product type to deliver these requirements more quickly. Investors have played a critical role in supporting the delivery of higher density supply and will need to continue playing a key role going forward.
Who are the investor households?
Based on the ABS Survey of Housing and Occupancy Costs (FY20, most recent release), around 15% of households owned a residential property, beyond their principal place of residence, which they rent out in the private rental market.
In its Report, Colliers notes that investors reflect a relatively diverse group, with primary investors comprising households of 35–64-year-olds (71% of surveyed investor households). The peak age for investors lies between 45- and 54-years-old (24% of investor households).
Notably across the prime investor cohorts (35-64 years), there were around 4.4 million households that did not own an investment property.
This cohort therefore represents a major opportunity to help support supply, encouraging an increase in rental supply.
Opportunities in multi-property households
Based on the ABS’ survey, there were 986,000 households that owned one investment property, representing around 68% of investor households.
With this in mind, a key idea to grow supply is to encourage greater diversity in investment activity, including, by encouraging investors into the market from the 4-plus million households that are not are not in the market, particularly the 45-54 years cohort, that may have the financial capacity to enter the pool of future investors.
This could help provide wealth security and access to participation in the marketplace. More Australians becoming investors not only contribute to solving the issue around supply but means they are able to move towards financial independence, based on the long-term performance of the Australian housing market. This independence will help ease the burden of an aging population. Innovation through funding models, such as co-funding or fractional ownerships could also provide alternatives to help lower the cost of entry for participation by younger cohorts with a more limited financial capacity.
Apartments as a strong driver of supply
Colliers also highlights that apartments are a strong driver of supply and will play a prominent role in supporting national housing goals.
The company states that Sydney recorded the deepest potential apartment investor market, with the strongest acceptance of higher density living, which is underpinned by dwelling choices and pricing fundamentals.
In 2021, there were approximately 303,000 apartments in the occupied private rental market within Greater Sydney (55% of privately rented stock). Across Greater Melbourne, the equivalent statistics represented 154,000 rented apartments (32% of rented stock), with 99,000 (29% of rented stock) in South East Queensland. Canberra and Newcastle recorded a smaller count, reflecting their market size with 16,000 and 4,800 occupied rented apartments, representing 41% and 25% of their rental stock, each, respectively.
Significantly, the count of rented apartment stock within Greater Sydney is higher than the combined rental stock in the major east coast cities.
Of the total private occupied apartment stock across the major east coast cities in 2021, around 55%-66% is rented (investor owned), with the potential for this to be higher under more normal conditions (in addition to the count of occupied stock above, due to some markets being impacted by closed international borders at the time of the census).
Over time, there is a strong possibility for the count of dwellings within Melbourne’s private rental market may become comparable to Sydney through a greater proportion of apartments in the investor-held pool as pricing pressures elevate and greater considerations for affordability support higher density dwelling options.
Interestingly, Canberra demonstrates pricing fundamentals more aligned to Melbourne with a greater expression of apartments within its rental stock, which reflects a more centrally planned urban form.
Recent market performance
The rental market remains robust and average rents firm with vacancy rates still at near historic lows. While there have been some changes to household formation rates through the early 2020s, pressures within the market remain.
The range of fundamental demand and supply factors suggest that current indicators will be sustained in the market for some time given the interplay between strong ongoing housing demand and weak new future supply.
“Investors have played critical role in supporting the provision of housing options and will be required particularly to support new housing in the future. This is particularly important across Metro Sydney where nearly 2/3rds of private supply is rented (investor owned) and represent a larger count of rented stock. While owner occupiers will be a key avenue of demand the capacity to nurture and support investor participation in the market will represent a key driver of new supply across Metropolitan Sydney,” Blake Schulze, National Director | Residential at Colliers said.