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Rising Rents To Draw Property Investors Out Of Hibernation

Rising Rents To Draw Property Investors Out Of Hibernation
March 16, 2020 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Household rent increases of between 3 and 10 per cent over the last 12-months, strong yields and record low interest rates will drag property investors out of hibernation. It’s inevitable!

While household rents in Australia’s four largest cities didn’t really move during the 2019 calendar year, research conducted by Propertyology has identified 23 individual cities and towns where the median rent increased by more than 3 per cent.

Propertyology’s analysis of the property markets of Australia’s 550 municipalities concluded that Moranbah’s 18.5 percent increase in median rent was the biggest increase in Australia last year, while Glenorchy LGA in Hobart (10.3 percent increase) had the highest capital city increase.

Australia’s Top 10 annual rent increases for 2019 also included Parkes in NSW (13.3 percent increase), Portland in Victoria (Glenelg LGA, 15.4 percent), Gladstone in central Queensland (12 percent), Ararat VIC (11.5 percent), Victor Harbour in SA (11.1 percent), Benalla VIC (10.3 percent), Emerald QLD (10 per cent) and Kingborough in Hobart (9.8 per cent).

Generally speaking, rents have increased significantly in regional Victoria over the last couple of years while, more recently, rents are coming under increasing pressure in regional Tasmania, regional Queensland and in the Pilbara.

The volume of new rental supply has been insufficient to keep pace with new demand, due in part to a series of credit tightening policies enforced by APRA between 2015 and 2019, progressively squeezing property investors out of the market.

Throughout the last couple of years, Propertyology has frequently made mention of expanding economies in various parts of Australia driving an increase in rental demand.

Tightening vacancy rates and the early signs of rising rents is often a precursor to asset values rising.

Truth be known, real estate market conditions are utterly salivating at the moment. Sooner or later, property investors will cotton on and come out of hibernation.

The biggest line item in an investor’s annual profit-and-loss statement has always been ‘interest expense’ and that’s now a record low 3.5 percent or better. Combine that with rental yields (investment income) of circa 5 percent and that means, even with small deposits, the system is effectively paying for all of costs associated with holding an investment property.

For those aspiring for a comfortable retirement lifestyle in years to come, these never-seen-before conditions are a property investor’s utopia.

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With the exception of Hobart and, to a lesser extent Canberra, the pressure on rents has been strongest in locations outside of Australia’s capital cities.

Over the three years ending 2019, strengthening local economies and tightening rental supply have already been responsible for capital growth rates that were superior to 7 out of 8 capital cites in the likes of Orange (29 percent), Burnie (28 percent), Ballarat (27 percent), Geelong (25 percent), Launceston (24 percent) and Mildura (20 percent).

Creature-of-habit property investors from big cities would be wise to remove the blinkers and take a proper look at all of Australia.

While rental supply is now fast catching up with demand in the likes of Ballarat and Geelong, rental vacancy rates in various other parts of Australia have tightened significantly. Recent rent rises may be the first tangible indication of rising property prices being just around the corner.

A strong recovery in the natural resources sector is primarily responsible for 12-month rent increases in Karratha (9.5 percent), Muswellbrook (8.6 percent), Mackay (8.3 percent), Mount Isa (5.3 percent), Whyalla (4.5 percent) and Rockhampton (3.4 percent).

Other regional communities with different economic profiles that produced strong increases in median household rents in 2019 include Warrnambool (8.8 percent), Noosa (7.8 percent), Launceston (6.3 percent), Townsville (6.1 percent), Bendigo and Armidale (both 5.9 percent), Katherine (4.7 percent), Cairns (3.6 percent) and Bunbury (3.2 percent).

Burnie in Tasmania (0.4 percent) and Mildura in Victoria (0.9 percent) are among the tightest residential vacancy rates in Australia. Similarly, Hobart’s consistently sub 1 percent vacancy is reflected of increased migration (demand) which has not been sufficiently matched by property investor activity (rental supply).

Conversely, Sydney’s vacancy rate remains at an all-time record high of 3.1 percent (or 22,707 dwellings advertised for rent). Approximately 60 percent of property transactions during Sydney’s last property boom (2013-2017) were by investors, meaning a swell of new rental supply.

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