RBA finds investors are older, wealthier

A NEW Reserve Bank research paper has determined Australia has a large number of housing investors and many of them are over the age of 60.

The report has found that there is a large cohort of investors who negatively gear and chase capital gains, leading to the nation having a high level of household debt.

And the paper has said that changes in projected capital gains outcomes, which will occur when the Budget reforms take effect, could see many investors sell.

RBA analyst Alexandra Michielsen said housing investors differ from owner-occupiers in both their incentives and behaviour.

“Their housing purchase decisions are primarily driven by expected financial or capital returns rather than finding a place of residence and tax incentives such as deductibility of interest expenses further shape their behaviour,” she wrote.

“Unlike in many countries, households in Australia comprise a significant share of the investor base in the residential property market; this is one factor contributing to Australia’s relatively high level of household debt.”

The RBA has previously noted that housing investors, on average, have higher incomes, greater wealth and larger liquid asset buffers than owner-occupiers.

“Investors are important for financial stability because, if their activity were to drive unsustainable increases in housing prices, leverage or weaker lending standards, the economy would become more vulnerable to macroeconomic shocks,” Michielsen said.

As at 2022-23, there were 2.3 million individual housing investors, equivalent to roughly 10 per cent of the working-age population. Investment properties accounted for around 20 per cent of the dwelling stock.

The share of investors relative to the working-age population rose steadily over the 2000s and 2010s but has been broadly stable more recently. 

As at 2022-23, around 70 per cent of housing investors owned just one investment property.

The remaining 30 per cent owned multiple properties, though those with multiple investment properties owned around half of all investment properties. The share of investors owning more than one property has increased by seven percentage points over the past two decades. 

“Owning multiple properties can provide benefits during a negative economic shock, from diversifying income streams and asset values,” Michielsen said.

“However, investors holding multiple properties tend to carry more debt. Resilience could be undermined if the portfolio of properties is highly leveraged (with little equity cushion).

“In a negative shock, synchronised sales of highly leveraged investment properties could depress the value of all properties (given prices are set at the margin) and thus amplify the housing price cycle in a downturn.

“Any diversification benefits from holding multiple investment properties could also be foregone if these holdings were geographically concentrated or similar in type.”

Around 80 per cent of housing investors who own multiple properties hold them in the same state or territory.

The RBA’s repport showed the median age of housing investors increased from 45 to 51 years between 1999-2000 and 2022-23.

Over this period, the share of housing investors aged over 60 years has risen from 12 to 28 per cent.

“This shift reflects both broader population ageing and an increasing incidence of property ownership among older cohorts, with around 40 per cent of the change attributed to broader population ageing,” Michielsen said.

“There has been a notable increase in the share of housing investors aged over 60 with a mortgage over recent decades.

“However, only around half of investors in these older cohorts had a mortgage against their investment property in 2022-23.”

Older investors may also have greater accumulated wealth or supplementary sources of income, including from superannuation portfolios, other financial assets held outside the superannuation system and pensions.

“That said, a large decline in the value of asset portfolios (from which income streams are drawn) could reduce the financial resilience of some older investors in the event of an economic downturn,” Michielsen said.

Alongside the increasing age profile of housing investors, as a group they tend to be higher income earners.

Higher income earners are much more likely to own investment properties than those on lower incomes.

In 2022-23, the highest income quintile accounted for nearly 40 per cent of all housing investors in Australia. Over the past decade, investor participation has become marginally more skewed towards higher income households away from the middle of the distribution. 

“Several factors explain the large share of high-income housing investors,” the report showed.

“Higher income investors have greater borrowing capacity and have benefited more from tax concessions such as negative gearing and capital gain discounts.

“Rising property prices have lifted entry costs, making housing purchases harder for lower and middle-income households over time.

“For stability of the Australian financial system as a whole, the prevalence of high-income investors is a source of resilience.

“Higher income households also spend a smaller share of their income on essential expenses, giving them greater capacity to absorb shocks, and they have historically been less likely to become unemployed.” 

Michielsen said many housing investors negatively gear their properties to avail of tax deductions on interest and other property-related expenses, with the expectation that long-term capital gains will outweigh short-term losses.

“However, this reliance on future price growth can leave investors exposed to changes in interest rates, housing demand and broader macroeconomic conditions. In a downturn, rental income could also be disrupted,” she said.

“This reliance on capital gains alongside negative cash flows may make investors more likely to sell during a downturn or when expectations of future price growth are reassessed.”

Overall, housing investor characteristics have remained broadly stable over the past 20 years, a period in which housing investors have defaulted at lower rates than owner-occupiers.