Vacancy Rates Rental Crisis



Yes, we facing a Rental Crisis in Australia!

Rental vacancies continued their decline over June on already historical low levels and the new Labor Government must prioritise this rental property crisis!

Across all cities, rental vacancy rates have fallen to 1.2% across Australia, and continue to fall. With many locations having lengthy lines of needing to be tenants. In Regional centres there are families camping out waiting on rental accommodations to become available. The supply of rental properties is at record lows around the nation, the situation will worsen due to softer market conditions, rising interest rates, investors borrowing capacity being reduced, build price and land price increases, bank valuations falling short = all aligned in a ‘perfect storm’.

Covid-19 has altered the property market on the back of a trend to migrate out of the big cities, placing immense upward pressure on the supply of rental accommodations in sought after locations / regional cities and towns, and as a direct result the price of renting has and will continue to escalate.

Now remains an investors dream position coming true for astute investors who identify how this perfect storm will play directly into their hands. And good on them for putting their hands up to become a landlord.

At the same time, the usual suspects (want to be investors) will again find all the reasons not to invest. Such a pity.

With flooding in NSW and also QLD, people who have lost their homes are also desperate to find rental property whilst they rebuild or renovate. Further adding to the existing woes of want to be and need to be tenants.

When our international borders open up and immigration into Australia resumes, this too will heighten the increase on an already exceptionally tight rental market. Remember there has been a hiatus of 2 years on international immigration and this is soon to change, allowing immigrants to come into Australia will further burden an already extremely tight rental market.

Politicians called to Address the Rent Crisis

It is evident that residential vacancy rates are at an all time low and the result is a rise in rent being paid. These rates are at 16 year record rental lows. Partly caused by previous government and RBA interference in putting the financial brakes on banks lending to investors which has resulted in investors not adding sufficient rental supply to the market for the past 5 years!

Review the Logic : No investors = no new rentals = growing population = high property prices = affordability to buy drops = more renters = low supply of rental property = increase in rental yields.

Viscous cycle when one interferes in a natural market! We predicted that to become inflationary (prior to the advent of Covid-19) where Covid has further exacerbated the situation.

It is because of this that the property industry is calling on which ever party wins government in the upcoming elections to address the looming rental shortage crisis.

CoreLogic statistics show that investors account for only 32.6% of mortgage demand by value in January 2022, down from the past decade being 34.9%.

When you apply lending restrictions on want to be investors, who are willing to take a risk and secure an investment property to put onto the rental market, the result is punitive on those who are unable to afford to purchase. We stated the same thing when Labor Government recently wanted to abolish negative gearing. We stated “they will be punishing their own voters!” Because the impending result is inflationary. Pushing the tall poppy syndrome to attract votes would have cost those very voters a lot more in rent!

It is simply punitive for political parties to simply offer ‘piecemeal’ funding for affordable housing when there is currently a critical undersupply of rental properties. This was identified back in 2017, when lending restrictions came into play.

The industry is thus calling for “sustainable policies to increase the supply of rental properties, and to treat this as very urgent.”

As a property investor, this is landlords market.

Statistics gathered by Domain show that the vacancy rate nationally is continuing its downward trend now sitting at a low of 1.1% (nationally). A low of 3% is acceptable, at 1.1% this means that a property lies vacant just long enough for the steam cleaned carpets to dry before the next tenant in the queue moves in.

There are many locations where the vacancy rate is below 1%. The rental market is exceptionally tight which results in an increase in rental yield for investors due to insufficient supply of suited rental accommodations. The decline in vacant rental listings across Australia continues to substantially dip below the Covid-induced spike over the past two years.

The likes of Sydney (2%) and Melbourne (2.3%), who suffered higher vacancy rates than other parts of Australia will also benefit from international immigration into Australia as our border reopens, These cities are already showing signs of improved vacancy rates in both the suburbs and also the CBD’s although still significantly below other cities and regional centers vacancy rates.

Statistically, the closer one gets towards the CBD the higher the increase in vacancy rates, demonstrating that people are still wary of high density living. In Melbourne, the CBD primarily attracted a significant proportion of temporary visa holders, migrant workers and students who left Australia during Covid and yet to return. Hence the peak of vacancy rates for Melbourne and Sydney CBD’s. Interestingly, Brisbane sits with 0.9% vacancy for the whole of Brisbane which would also include the CBD.

Interestingly enough Domain’s statistics demonstrate that only Adelaide (0.3%) and Hobart (0.2%) have continued with a very steady vacancy rate trend, largely unimpaired by Covid-19 trends.

With overseas migration set to soar over coming years, where are these new Aussies going to live if we don’t even have enough rental properties to house our current population?

a system to increase supply is needed

Rental Yields

Did you know that rent for detached houses has increased by as much as 15% over the last 12 months as the main driver for rental increases is vacancy rates! A direct reflection of Supply v Demand. Low supply versus a high demand equates to landlords increasing the rent. We are firmly in a Landlords market with tenants competing for accommodation, resulting in rental increases.

On the back of property prices going up significantly, land prices rising and also a substantial jump in building costs these combined factors has resulted in rental yields, as a percentage of the property, dropping in value.

Yes tenants are prepared to pay more rent and will pay more rent to secure a property, an increase in rent usually follows property price growth and in this case on the back of incredible demand for rental property and a dire shortage of rental properties, this has exacerbated the yield in the favor of the landlord.

On new property, which attracts a higher yield over an older established property, yields of 5% in South East Queensland or 4.5% in Melbourne were common place. To put a new property onto the market today, it costs the owner more yet the rent as an overall percentage on the cost of that new built property would now equate to around 4.5% in SEQ and 3.4% to 4% in Melbourne by way of example for a newly built house.

On established older properties yields are substantially lower as a percentage (we are not referring to wayward towns where yields remain high at the expense of capital growth), we are referring to new suburbs coming out of the ground on the outskirts of the capital city or regional cities.

If we consider closer into CBD’s of capital cities, the yield as a percentage has always been low due to the high cost of the property closer in. By way of example a property with a market value of $1.5m may attract around $850pw (2.9%), a one bedroom apartment at a market value of $450k could achieve $450pw (5%) yield; with apartments having far lower capital growth potential over homes or townhouses.

Effect on Rents when interest rates increase?

A strong potential side effect of an increase in interest rates, and it is coming, is that those who did want to purchase to live in may not qualify for the amount required to purchase and thus they become a Landlords Tenant. An increase in interest equates to potential buyers having increased difficulty getting a loan or even getting a loan they need to buy what they need to live in, and this will add extra pressure on our already stressed rental market.

There are fewer First Home Buyers loans being approved on the back of a sharp increase in property prices, making it affordability more difficult for FHOB’s to purchase what they want or need. Similar problems facing non FHB’s too.

When is the best time to be Investing in Property?

Yesterday and Today!

Australia for the past 20 or so years, as it evolves and grows it’s population, has always demonstrated low vacancy rates and healthy rental yields. Over the past 20 years we have witnessed property values doubling every 5 to 7 years. Unusual trends which one should not count on repeating in a hurry but one never knows, do we as the ‘experts’ have predicted many harsh property corrections and the values defied them and grew again.

If as an investor you are comfortable with your investment doubling in value every 12 to 15 years and do your numbers on slow and steady capital growth with rental yields of today’s standards rising by at least inflation and the numbers present well, you would be confident in investing in property.

Now when you Leverage into your investment by using the banks money at an 80% or 90% loan already you are placing yourself into a position where you have only invested the 10% or 20% yet you are achieving capital growth on 100% of the asset value, compounded over the life of the investment – the numbers start to look sound for you, don’t they.

When you then add in the fact that your tenant helps pay off the investment property loan, where vacancy rates are 3% or below you would have to ask yourself where else can you get that same 10% capital invested working as hard for you, with as low a risk profile property traditionally has when one holds it for 7 to 10 years?

If you can find a better solution or investment vehicle, please share it with us, because the answer to ourselves is ‘nowhere’.

Add to this the ability to deduct depreciation against your taxable income and you soon realise that you could be paying yourself first then the tax man second. Depreciation allows you to deduct the amount from your own taxable income, meaning you pay less income tax for that year. So for helping a tenant find a new rental property, the tax man helps you by allowing certain deductions including depreciation.

Are you aware that you are able to claim higher depreciation on a new build as the first owner, compared to an already built property no matter how new it may be?

Ask us to explain here

The data shows that there are about 35,000 fewer vacant rental properties now than there was three years ago, which clearly highlights the current rental crisis,” Ms McDougall said.

a vacancy rate of 3% is where equilibrium point lies
Read further on Labor Government and the Rental Crisis here

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