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How Far Can Rents Rise? - July 2022

By Guest Blogger, Terry Ryder, founder,

hotspotting.com.au and propertyU

 

While media obsesses over speculation about property prices, a far bigger issue for residential property is the extraordinary shortage of rental properties.

I have been researching real estate for 40 years and I have never seen rental markets so tight in so many places. Vacancies have been low for years but they keep falling and now all eight capital cities are well below 2%, with six of them between 0.4% and 0.8%. The national average is 1%.

“Crisis” is an overused word in media but this truly is a crisis. Desperate individuals and families can’t find a rental home at any price and businesses can’t fill job vacancies because willing workers can’t find a place to live.

This has caused rents to rise in most locations across Australia, particularly in the past 12 months.

SQM Research figures suggest residential rents have risen 12% nationally, with bigger rises in the capital cities (around 15%). But individual cities have grown more – both Sydney and Brisbane have recorded annual rent rises for houses above 20%.

No government at any level has put forward a solution to the shortage and it’s clear the problem will get worse before it gets better.

All of the latest real estate measures announced by federal, state and local governments are likely to make the rental shortage worse. Politicians at all levels seem determined to punish Australians for owning investment properties – a trend which has been prevalent for the past 5-6 years and which is the prime cause of the shortage.

Investor buying activity has been well below historical averages in recent years and the result has been a steadily diminishing supply of rental properties. The growing use of short-term letting options like Airbnb has contributed, although it’s not the primary cause of the under-supply.

The recent re-opening of international borders, with the flow of overseas migrants and students starting to return, will place further pressure on the meagre supply of rental properties.

Prime Minister Anthony Albanese has foreshadowed an increase in immigrants to deal with labour shortages throughout the Australian economy – and that will pour further demand on rental markets.

I find it remarkable that none of the major parties presented any policies in the recent Federal Election to deal with the rental crisis. The Greens suggested policies which would make the problem considerably worse.

Given that (a) a third of Australian households rent and (b) 92% of rental homes are provided by the private sector and only 8% by government, the only way to remedy the shortage and get rental markets back into balance is to provide encouragement and incentive for Australians to buy investment properties.

To date, the opposite has been happening and there is worse to come. Many states have introduced, or will soon introduce, new laws which are onerous to landlords and extraordinary land tax measures by the Queensland State Government may cause an exodus of investors from that state.

If the Greens have their way, there will be rental caps across the nation and that will cause even more investors to sell. And it won’t help desperate tenants – if vacancies are near zero and you can’t find a rental property at any price, a rental cap is no use to you.

So rental properties are going to become increasingly scarce. There’s no foreseeable end in sight and the cost of being a tenant is likely to keep on rising well into next year.

While all this is bad news for tenants, it’s helpful for investors because rent increases and therefore higher yields can compensate for higher interest rates (provided they can overcome the onerous impacts of new laws in states like Victoria and Queensland).

It’s common now for an open house to attract a queue of 20 or 30 prospective tenants, and some will offer more than the asking rent to beat the competition.

Tenants who move out, sometimes because they have decided to buy rather than rent, they’re often doing the landlord a favour because re-letting can achieve a 20-25% increase in income.

Property managers reluctant to upset tenants by lifting rents in line with the wishes of their client, the landlord, should remember who pays them. However, a win-win is always the best outcome and a smart investor will realise it’s better to maintain continuity and retain a good reliable tenant by seeking a more moderate rent rise rather than squeezing the absolute maximum out of the situation.

It’s likely more tenants will take advantage of first-home-buyer incentives – and the reality that it can be cheaper to own than rent, in some locations at least – and save money by buying.

But change will be slow. There’s no easy fix to the crisis and even smart proactive solutions by politicians (unlikely, because we are governed mostly by idiots who see the housing market as a cash cow) would take time to have an impact.

 

 

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