‘Higher risk’: RBA, Citi sound alarm on property investment

The latest Financial Stability Review from the RBA, released Friday (13 October), included analysis of households’ investment property exposures using insights from tax data.

The central bank found that around half of investment properties are owned by investors with multiple properties. Further, 20 per cent of investors own two properties and 10 per cent own three or more.

“The number of investors with multiple properties has grown relative to those with a single property, particularly between 2013/14 and 2014/15,” the RBA said.

“Indeed, the number of investors with five properties grew by 7.5 per cent in that one year, compared with average growth of 4 per cent over the previous nine years.”

The data does not provide information on the characteristics of investors with multiple properties, the RBA noted.

“However, given the strong growth in investor housing credit and riskier types of borrowing over this period, investors with multiple properties have likely contributed to higher risk.”

The Reserve Bank's warning comes after a Citi Research report analysed a database of 52,000 households from Digital Finance Analytics (DFA) and found that 12 per cent of investors have six or more properties. 

Citi believes that tighter lending criteria and rising house prices have meant investors increasingly face net negative cash flows.

"Historically, investors ‘sit tight’, but this has become increasingly less viable, as tighter application of Responsible Lending laws means that investors must now have a clear debt repayment plan."

The proliferation of multi-property investment households has also driven a rise in interest-only finance utilisation by owner-occupied borrowers. These borrowers are more susceptible to interest rate rises given higher average borrowing levels.

"We think all major lenders face a responsible lending risk."

Low-income borrowers are negatively geared

The RBA's Financial Stability Review data found that around 11 per cent of taxpayers earning less than $50,000 have investment properties.

“While lower and middle-income households are less likely to own investment properties, they make up a larger share of property investors because there are more of these types of households,” the RBA said.

“Lower-income households are just as likely as higher-income households to be negatively geared, with interest payments and other property expenses exceeding rental receipts.

“Indeed, the majority of investors with a mortgage are negatively geared.”

Relative to total income, the rental loss is largest for the lowest income bracket and gets progressively smaller for higher income brackets. The central bank said that this suggests that lower-income taxpayers may be more vulnerable to increases in debt repayment obligations or reductions in income.

“They might also be more reliant on rental income to meet their repayments. About 35 per cent of individuals in the lowest income bracket are over the age of 60 and the majority of this income group did not have any salary income (though they may have superannuation or other non-taxable income not included in this classification).

“This suggests that this group could include people who are retired or temporarily out of the workforce.”

[Related: Investors continue to defy APRA curbs]