Investors make up about 70 per cent of visitors at broker Andrew Ienna's open houses in Sydney's western suburbs as low borrowing costs lift returns on rentals, and high prices and deposits scare off first-time buyers.
The value of home-loan approvals for investors rose 4 per cent in December from a year ago in seasonally adjusted terms, while mortgages for owner-occupiers fell 1.8 per cent in the same period, government data show.
"The gap between rental payments and mortgage payments is tightening," said Ienna, director of Laing+Simmons's franchise in Blacktown, 35 kilometres west of Sydney's city centre.
"First-home buyers struggle to get a deposit together, so there is going to be more of a rental crisis. That's good for landlords."
From Sydney's inner suburbs to the mining towns of Western Australia, investors are taking advantage of the lowest mortgage costs since 2009 to profit from a national vacancy rate that has been below 2 per cent for more than three years.
The number of suburbs where it was cheaper to buy a home on a variable-rate mortgage than to rent rose to 494 in December from 388 two months earlier, figures from researcher RP Data showed.
"It gets most tempting for investors when mortgage rates get below 5 per cent," said Matthew Hassan, Sydney-based senior economist at Westpac bank. "They're getting close to that level, and if you couple that with vacancy rates around 2 per cent, especially if we get some renewed gains in rents and a clear stabilisation in prices, that will encourage more investors into the market."
Australian banks lowered discounted variable rates by 105 basis points in the past year to 5.65 per cent, the lowest since November 2009, according to the Reserve Bank of Australia.
About 85 per cent of the mortgages granted in December were variable, government data showed.
Three-year fixed mortgage rates slid 85 basis points to an average 5.45 per cent in the 12 months to the end of February, according to RBA figures, the lowest level since the central bank began collecting data in 1990.
First-time buyers made up 14.9 per cent of borrowers in December, the lowest level since 2004, down from 15.8 per cent in November and 21.1 per cent a year earlier, the figures show.
The decline followed changes by state governments late last year in New South Wales, Queensland and South Australia replacing grants aimed at first-home buyers with those targeting only new homes.
"I'm seeing quite a bit of activity among investors taking out loans, and it's obvious the banks are busy," said Craig Betalli, a property finance consultant based south of Sydney with LJ Hooker Finance. Renters are "becoming concerned about value as interest rates have fallen".
In the inner suburbs of Melbourne, few renters were looking to purchase as elevated prices froze out first-time buyers, according to John Piccolo, chief executive of Woodards Real Estate, which operates 11 offices within 20 kilometres of the city centre. Melbourne's home and apartment prices declined an average 2.9 per cent last year a further 0.4 per cent in January, giving a median price of A$492,500 (HK$3.9 million), according to RP Data.
Most purchasers were investors, drawn by both rising rents and low vacancies and relatively higher returns compared with alternative investments including cash and bonds, he said.
Melbourne's vacancy rate, the highest in Australia at 3 per cent according to SQM Research, is still almost a third of the United States' rate of 8.7 per cent, based on census bureau figures.
Australia's national vacancy rate fell to 1.9 per cent as of January 31 from 2.3 per cent in December, figures from SQM Research show. Excluding Decembers, when vacancies see seasonal spikes, the rate has remained at or below 2 per cent since September 2009.
The increase in investor demand was a change from previous housing recoveries, which were led by first-home buyers, said Tim Lawless, residential research director at Brisbane-based RP Data.
While first-time purchasers have stayed on the sidelines this time as government incentives faded, they were likely to return as rents climbed, he said.
"The market tends to naturally balance, so as rental costs get higher, we'll see renters start looking at purchase options," Lawless said. "If we can't afford to buy a detached house, let's buy a unit. If we can't afford to buy in the inner ring, let's try the middle suburbs."
A shift is beginning in some parts of the country, with the rate of rental growth slowing last year compared with the previous three years, according to SQM Research.
Rents increased 3.2 per cent for houses and 2.6 per cent for apartments across Australia's capital cities last year, according to RP Data.
"Although landlords continue to wield control of the rental market, this control is waning," according to SQM. "This is most likely attributed to the latest recovery in the housing market, prompting renters to exit the rental market in favour of purchasing property."
Payments on a 30-year home loan with a 10 per cent deposit and a 5.65 per cent variable rate were lower in 494 suburbs out of a total 5,348 as of December 31 when borrowers paid down both the principal and interest, according to RP Data.
On interest-only loans, the number rose to 2,436 suburbs, compared with 1,975 in October, when the rate was 5.9 per cent, RP Data said.