Amid record vacancy rates and rising rental prices, an expert gave him his thoughts on what this could mean for investors.
Housing affordability has been a key issue for homebuyers over the past two years, and while the spotlight was once solely on home prices, the conversation has shifted to rentals.
Vacancy rates hit their lowest level in 16 years in February in what experts called a rental crisis – rent increases were also the biggest since the 1970s according to SQM Research.
The market is only expected to tighten – property experts such as Propertyology’s head of research Simon Pressley have predicted rents could rise by $5,000 or more this year across the country.
Prices go up, yields go down
According to PRD, rental yields – or the amount of income investors receive from their rental property – have fallen across the country over the past 12 months.
Specifically, gross house rental yields fell in most cities of Sydney, Melbourne, Brisbane and Hobart.
The same goes for gross rental returns – the only exceptions being the Brisbane Inner Belt (up to five kilometers from the CBD), the Brisbane Outer Belt and the Sydney Outer Belt.
According to Dr. Diaswati Mardiasmo of the PRD, the reason is simple: the median growth in property prices has exceeded the median growth in rental prices.
“For example, the median annual growth in the sale price of homes in Sydney’s inner belt (0-5km from Sydney CBD) was 35.5%. However, the median growth in the rental price of homes was 2.4%,” Dr. Mardismo said.
Essentially, housing values have risen so much that rental prices can’t keep up despite rents growing at the fastest rate since 2008.
“In areas where rental yields have fallen (…) there is an imbalance between the stock for sale and the number of buyers,” Dr Mardiasmo said.
“Many areas are undersupplied, causing the median selling price of homes to rise exponentially.”
With that in mind, she said it was important to remember that every Australian market is unique, although there are similar trends.
“This is due to the balance between local supply and demand, the local economic structure, the demographic composition and the future developments planned for the region,” Dr Mardiasmo said.
“For this reason, an investor must dissect each market to get an overall set of information before making a decision.”
See also: Top 20 Undersupplied Suburbs
What future for investors?
While all of this may sound catastrophic, Dr Mardiasmo said falling rental yields aren’t necessarily a bad thing for investors.
This is especially true if median rental price growth is high, vacancy rates are low, days on market (for rent) are declining, and future development projects are planned for the area.
“Investors primarily rely on two key metrics in their pre-purchase decision making: rental yield and vacancy rates,” Dr Mardiasmo said.
“Investors, in general, choose areas with high and/or increasing rental yield and low or declining vacancy rates. Together, this makes for an ideal investment environment.”
Dr Mardiasmo said the “main” source of uncertainty for the near future is the upcoming federal budget and the upcoming election.
“These two events could change the course for investors, as there could be policy changes that impact taxation, deductions and purchasing abilities,” Dr. Mardiasmo said.
“Any potential change in negative leverage will create uncertainty and reduce investor confidence.”
She said available stock is still low across Australia and with the slackening of interstate and international migration, a new imbalance between supply and demand is imminent.
“This rings true in both the sale and rental market, and this fundamental problem will not be resolved in March or May,” Dr Mardiasmo said.
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