Source: Courier Mail
In a market where rents are rising 25 per cent, soft er prices and rising rates do not explain the exodus of private investors.
In every city across Australia the rent crisis is hitting hard. Anyone who needs to rent finds out very quickly there is very little on offer and prices are rising rapidly. For property owners, however, it’s a red-hot market. The single biggest risk for private investors in property investment – the risk of missing rental income – has effectively been removed. But private investors are quitting this lucrative market in droves; As Hayden Groves, the president of the Real Estate Institute of Australia puts it, “investors have been running for the hills”.
Why are investors giving up when capital city asking rents are rising by 25 per cent a year?
You might assume the nationwide drop in property values is highly relevant. But an 8 per cent fall in prices over the last year does not explain it fully. Similarly, rising interest rates may explain why highly leveraged investors quit the scene, but rates are not high on a historical basis.
What is exceptional about the property market just now is not rates or prices – it’s the scarcity of empty accommodation. Investors who scan the wider investment market looking for income could only be impressed with residential property returns: Having remained steady for years, bricks and mortar does not just offer steady income, but steadily rising income – the ultimate prize in a market where inflation could be here to stay.
Inside the capital cities where income returns – as opposed to capital returns – have been unchanged for years, the figures are finally lifting off rock bottom and are now approaching 4 per cent. In regional centres the yields are higher again with some cities as high as 6 per cent.
Generally, units are getting better yields than stand alone houses. Official statistics don’t separate owner occupiers from investors but two factors reveal the exodus from property. First, the number of rental listings on the market is down a stunning 26 per cent over the year.
Second, investor lending has fallen by 23 per cent over the last year according to the latest Australian Bureau of Statistics figures. (This is broadly comparable with the overall drop in lending to owner-occupiers.) The rental shortage showed a small improvement over the last few weeks when the national vacancy rate inched up from 1 per cent to 1.3 per cent. But this is splitting hairs – the market is super tight.
What’s more, it will tighten again in the weeks ahead, says Louis Christopher of SQM Research. “This is just a seasonal blip where we have some movement every year with students on holidays,” Christopher says.“The fact is that it’s going to tighten again in the months ahead.”
The reality is that vacancy rates – the key measure in judging the rental market – sit near 1.8 per cent in Sydney and Melbourne and less than 1 per cent in some other cities. To take the city of Perth as an example there is a vacancy rate of 0.5 per cent.
Under these conditions it is no surprise to see rent prices rising – in fact there are endless reports of rent bidding where prospective tenants bid more than the asking rent to get possession of the tenancy. In an effort to cool the situation NSW moved to ban rent bidding last year – but only where an agent prompts the process.
There is no plan to stop voluntary bidding from tenants, and consequently it is unlikely the situation is going to change soon. If you ask property owner groups such as the REIA or the Australian Landlords Association why are private owners quitting? They generally point to the same thing – excess regulation.
This is a state by state issue but it is clear that tenant rights are reaching something of a high water mark in Victoria. While in Queensland a particularly controversial effort to pull in money from property owners beyond the state if they also had property in Queensland shows how far state bureaucracies will go to tax property investors. (The idea has since been canned by Queensland Treasurer Cameron Dick.) It is also clear that some investors who held property through the pandemic – and its associated emergency rulings such as the moratorium on evictions – were sufficiently troubled by changing regulations that when the chance came to take profits in 2022, they moved fast.
However, most investors can look though such issues if the investing terms are attractive. Moreover, it’s not all bad news from state administrations. In NSW the Perrottet government has introduced an alternative to stamp duty where land tax is paid progressively – the measure is currently aimed at first home buyers. Will it work? You bet it will.
The early statistics show that any way a buyer can avoid stamp duty, they will do so. It is estimated that more than half of the projected annual level of applications to the NSW scheme were received in its first week of operation.
At best the Perrottet government’s move may spell the beginning of the end for a notoriously regressive property tax. It could also be a key factor in an eventual turnaround in property prices in NSW. Some analysts expect this could happen by the end of this year, largely on the basis that the state had recorded the sharpest falls to date. More broadly, history tells us that investors generally wait until prices have started to rise and that the first phase of price improvement comes from owner occupiers. This time around, the lift is bound to come from first home buyers who now have an extensive menu of federal and state incentives to help the enter the market.
For serious investors there is evidence that a peak for mortgage rates is now in sight. There is also some evidence that inflation is slowing. There is also the swing factor of renewed immigration which had yet to be fully priced into the local market – especially in capital city rental markets.
Standing back from it all, the Reserve Bank’s base case for the peak to trough property decline has always been 11 per cent and the majority of that fall has already taken place. Socially, the existence of a super low rental vacancy rate is bad news – it triggers homelessness at the bottom end of the market and considerable stress across the entire housing system. Some might not like the fact that private property owners control the market but they do — and that is not going to change anytime soon. Indeed encouraging investors to return to the market should be welcomed.Though searching for encouragement in this area will most likely be futile. Instead the investors who move earlier may well be the ones that get the biggest rewards and even if they have to wait longer for a turnaround, rental income will certainly not be a problem.
In this market you can literally rent anything.
