You could be forgiven for thinking that the downtrend in home prices seen in the markets of Sydney, Perth, and Darwin – happening amidst a crackdown on investor loans by the Australian Prudential Regulation Authority – suggests that investors were driving the housing market. What you might not know is how non-standard these investors are.

An analysis by investment firm Watermark Funds Management said the participation of mum and dad investors is currently at the extreme level by international standards. In fact, 35% of new mortgages in Australia were written to such non-institutional investors. This rate is around three times higher than that of US, UK, and Canada. In Australia's costliest market, the rate is even more extreme at 42%.

The report likened this situation with what happened to some cities in the US including the Atlantic City, Fort Myers, and Las Vegas, where investors account for more than 40% of total new mortgages. It noted that these cities had greater than 50% appreciation in the housing boom and a 50% larger correction when the market slumped compared to the national average.

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"This would suggest that markets with above average leveraged investor activity demonstrate above average price volatility. Given that the Australian national average is currently 35%, similar to Las Vegas at its peak, we expect the behaviour of Australian property investors will be a crucial driver of house price volatility moving forward," the report explained.

Citing analysis from JP Morgan, the report said investors "have dominated the housing cycle more recently, driving upswings in 2014 and 2016, and the subsequent slowdowns following macro-prudential tightening."

It also said that, should more investors decide to sell their properties and demand for investor loans continue to slump, price falls could increase.

"International experience tells us that falling housing activity has a depressing impact on employment and economic activity, and falling house prices have a negative impact on consumption via the wealth effect," the report stressed.

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