The property market is cooling: Here’s how income investors are adapting

Investment property has long been one of Australia’s favourite ways to generate wealth and income. 

However a new report from Global X has shed light on how a changing market is causing many investors to reassess that strategy.

Key market changes 

Rising interest rates, falling home prices and the Federal Government’s changes to negative gearing and capital gains tax (CGT) concessions are reshaping the economics of property investing. 

According to Global X, investors are increasingly turning to alternative sources of income, particularly exchange-traded funds (ETFs). 

ETFs offer access to dividends, bond yields and infrastructure income without the costs and complexity of owning property.

The shift is already showing up in the data.

The latest ABS Lending Indicators report revealed that investor housing activity weakened significantly in the June quarter. The number of new investor loan commitments fell 8.6%, while the value of investor loans declined 10.2% to $37.1 billion. That was by far the largest fall among major borrower groups and marked the sharpest quarterly decline in investor lending since 2022.

While property investors are pulling back, money is flowing strongly into income-focused investment products.

Property is becoming less attractive 

Global X highlighted that residential property has traditionally rested on two pillars: rental income and capital growth. Today, both are facing headwinds.

Borrowing costs remain elevated, reducing the cash flow generated by investment properties. Meanwhile, Australia’s housing market is beginning to lose momentum. Cotality’s national Home Value Index fell 0.7% in July, the largest monthly decline since December 2022. Major banks are reporting that mortgage applications have also fallen by as much as 20% since Budget night, highlighting weaker investor appetite.

Additionally, The Federal Government’s changes to negative gearing and CGT have added another layer of pressure. 

While investors once relied on generous tax benefits to enhance after-tax returns, the reduction of these incentives means many are now taking a closer look at whether property still delivers the income and return profile they need.

These factors are pushing income investors towards a different asset class. 

Income ASX ETFs

According to Global X’s latest ETF Market Scoop, Australian investors allocated a record $6.8 billion into ETFs in July alone, making it the strongest month on record for the industry. 

The report also revealed which type of ASX ETFs investors found most appealing.

Income-focused ETFs attracted a record $1.8 billion, including a record $1.4 billion into bond ETFs.

This surge suggests investors are actively seeking income opportunities outside traditional property investments.

Unlike residential property, income ETFs can provide diversified exposure to dozens or even hundreds of underlying securities through a single investment. Depending on the strategy, investors can access income from government bonds, corporate bonds, listed infrastructure, dividend-paying companies or a combination of these assets.

For investors accustomed to relying on rental income, these products offer an alternative source of regular cash flow without tenant management, maintenance costs, land tax or the need to take on large amounts of debt.

Investors seeking income-oriented ASX ETFs have several options to consider: 

• Global X S&P/ASX 200 High Dividend ETF (ASX: ZYAU)
• Betashares Australian Dividend Harvester Fund (ASX: HVST)
• Betashares S&P Australian Shares High Yield ETF (ASX: HYLD). 

The post The property market is cooling: Here’s how income investors are adapting appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Bell has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.