Tight rental market opens the door for long-term investors
A new report from property expert Domain shows Australia has a shortfall of 70,000 rental properties – heralding opportunities for property investors to enter the market.
According to Domain’s rent report for the September 2023 quarter, Australia needs an eye-watering amount of new rentals to balance out the rental market as it reaches a rental-affordability ceiling.
Domain chief of research and economics Dr Nicola Powell (pictured above left) said Australia remained a landlords’ market with the country’s rental vacancy rate having returned to a record low of 0.8%.
Referring to the Domain rent report, Powell said despite the opportunities for investors to enter the market at a time when rental demand and returns are high, property investment was about playing” the long game” with current market conditions favouring the seasoned investor.
“There’s been the longest stretch of rising asking rents and I think for an investor, it's challenging because the cost of holding debt has blown out so significantly that we have seen a portion of investors actually sell off because the burden of cost of holding debt has become too high,” said Powell.
“We’ve seen the pause in cash rate for a number of months now, we've got our markets recovering in price, we've got a tight rental market so logically, all of those conditions should actually draw investment activity back and we're starting to see it rise a bit, but I would say investment activity is grossly needed across Australia.
“We're certainly not meeting the needs of rental supply that are currently needed across Australia.”
Mum and dad investors may not be in the property market for long haul
Powell said Australia was unusual when compared to a lot of markets as a large portion of its rental stock was provided by mum and dad investors.
“[Mum and dad investors] may only hold one or maybe two investment properties, so their financial bandwidth to actually weather the heights that we've seen in the capitals is probably just not there and that's probably why we've seen investors sell up,” she said.
“The seasoned investor, that's in it for the long haul, is probably going to be the one that enters back into the market sooner than anyone else.”
Powell said different markets would appeal to different investors.
“There’s such different dynamics across the cities, because when you look towards a city like Sydney, most investors I would assume would be negatively geared because it's such a high-priced market.
“That's a certain type of investor that will chase a negatively-geared property versus somebody who's looking for a positively-geared investment property where we know those yields differ significantly depending upon the city.”
When it came to brokers’ conversations with investors, Powell said many of them would be focused on long-term strategies, mindful of the high transactional costs associated with property purchases in Australia.
“I think for an investor, they want certainty, they also want to reap the benefits of capital growth because that's how you change your financial position, and your financial wealth status, allowing you to build up equity and allowing you to build up greater leverage to then morph into your second or your third investment property.”
Yields will continue to be a key conversation between brokers and investors
Powell said for mortgage brokers, yields would remain an important focal point of their conversations with investors.
“The yield conversation is an interesting one to have with clients from a broker perspective, because we've got yields in Perth that are between 5% and 6% on a capital city level, versus in Sydney, where they're sitting at about 3% and Melbourne at about 3%.
“I suspect the brokers are also having conversations around [the fact that] some of the state governments have been talking about increasing taxes for investors, and that in itself can be a disincentive and actually almost scare investors away.”
Powel said while the Reserve Bank of Australia might decide on one more cash rate rise this year, “a long period of stabilisation of the cash rate” was more likely.
“The next movement from the RBA is still likely to be downwards, in my opinion.”
Australia’s ongoing rental crisis not likely to be resolved soon
Like Powell, broker Adam Rakowski (pictured above right), principal of Ortus Financial, said the current rental shortfall was in large part riven by “mum and dad investors selling their properties, and these being purchased by owner occupiers”.
“With interest rates likely to stay at heightened levels for the next 12 months, I don’t see this issue going away any time soon sadly,” Rakowski said.
Rakowski, who was named one of MPA’s Top 100 Brokers for 2022, said when it came to brokers’ conversations with investors, interest rates were at the forefront of their concerns.
“They can vary between 6% and 7% depending on the repayment type and very few properties will yield this much, hence the rates are driving much of the decision making,” he said.
“Some investors are also asking about interstate markets and whether banks’ appetites change when buying in non-metro areas; this is all about trying to find value with the capital cities still showing price resilience.”
Rakowski agreed with Powell that it was primarily the seasoned property investors, looking to add to their portfolios, that were most active in the market.
“They are seeing pockets of opportunity and looking at holding long-term,” he said.
“Of the mum and dad investors looking, they are predominantly looking outside of Sydney where markets are more affordable.”
Rakowski said no matter what happened in the rental sector, investors need to ensure they can service their loans.
“There is no doubt that vacancy rates are low which is helping keep a high floor on rental income,” he said.
“That said investors who borrow 80% of purchase price still need to carry the rental shortfall month to month as borrowing rates comfortably outstrip net yields.
“Most of the investors that are active in the current market have material surplus income from their ‘day jobs’ and they’re not as concerned with the ebbs and flows of the market day-to-day.”
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