The rental crisis in Australia as seen through the eyes of an investor
Many people believe the Chinese character “危机” means both ‘crisis’ and ‘opportunity’. Although this isn’t an accurate translation, it does however describe Australia’s current rental market.
For an investor, it is important to understand the long term ‘normal’ situation first. Approximately a third of people living in Australia rent a home, either as transitionary (e.g., moving out of family home, relocation for job/study, new immigrant, etc) or long term. Typically, the rental market has a vacancy rate of between 2.5% to 3.5%, which include tenants moving from one property to another. Around 95% of all rental properties are owned privately, and the Australian tax system rewards private investors with tax benefits such as negative gearing and non-cash deductions (e.g., depreciation), especially for a new house construction.
However, recently many factors have come together to create a rental crisis – such as cost of living and inflation, construction cost increases and materials shortages, lack of skilled workers, changes in the type/location of property required, consumer sentiment about the future of the economy plus the existing long-term shortage of property in Australia. For certain types of properties in certain areas, it has caused vacancy rates to drop, tenants to stay longer, and rents to rise (plus usually capital values too!).
The COVID pandemic has fundamentally changed the way people work in Australia, and many people have historically lived close to where they work. Currently with 50-year unemployment lows of 3.9%, many employees are demanding (or changing jobs to obtain) greater work/life balance with a 4-day work week, or ‘hybrid working’ of 2-3 days working from home. This is particularly evident in Melbourne, which by having the world’s longest lockdown, forced people to work from home for years facilitated by the recently developed high-speed national broadband network (NBN). This trend is also evidenced by CBD foot traffic & public transport usage rates being well down, and CBD office vacancy rates being at record highs.
Even though Australia has the 6th largest land mass, we have one of the lowest population densities of 3 people/km2 in the world. However, Australia has a high urbanisation level at 87% (Malaysia is at 78%), and Melbourne metro area is one of the largest cities in the world at almost 10,000km2 meaning that with this much space residents prefer to live in detached, landed property even in the metro areas. To illustrate this, recently in the news amongst 12 suburbs in Perth only a single detached landed property was available for rent.
Also, last year’s property price boom, motivated many landlords to sell their past rental properties for record prices – further reducing the stock available for rent. To further compound this lack of rentals, as tourism is opening up again, some existing rental properties have been converted into short term accommodation e.g., AirBnB.
The work from home trend and detached, landed property trends, and lack of rental stock have all come together in the exodus from small CBD non-landed property with people looking for properties that suit their new lifestyle requirements. Topping the list are bigger homes with more bedrooms to be used as a home office (or 2 home offices for couples), close to nature and amenities. These types of properties are usually found in master planned estates in outer metro areas. Certain economists call this overall trend ‘the great spreading out’.
Overall rents and vacancy rates in Melbourne and Sydney may seem down, but once you look past the non-landed CBD apartments (which were predominantly housing overseas students and tourists), the picture is very different. Rental demand in outer areas of landed property is very high, causing rents to grow sharply. Also, Consumer confidence about the economy in Australia is low, with high inflation set to go even higher according to the governor of the Reserve Bank (RBA). This concern for future rises in costs is especially so amongst tenants (as they have no other option e.g., buying a property), so they are favouring cheaper rentals to have a financial buffer against future price rises. Quality properties in this entry level price range are typically new properties in new communities.
Lastly, the construction industry is facing many challenges with the cost of materials and labour rising, plus completion delays – further compounding the lack of supply and competition amongst tenants. Investors who can lock in a building price with a reputable builder, e.g., Resimax’s Tick Homes, can thus take advantage of this opportunity for higher rental yield in the market once their house is built. Even though Resimax customers avoid any rental cashflow stress due to Resimax’s unique 5/10/20 Guarantee on certain properties, any rental income above this benefits the landlord.
Plus, landlords with properties managed by Resimax’s preferred property manager, Leap Real Estate, are also attracting the best long-term tenants, meaning less wear & tear on the property and a better community with their unique ‘lifestyle rewards program’ for tenants.
So, even during this rental property crisis, investors have an opportunity to finance much needed new rental stock to the market and be rewarded with cash flow, capital gain and tax benefits.
Disclaimer: This article is for general information purposes only and should not be taken as advice. Always seek professional advice from suitably qualified professionals familiar with your situation and goals.
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Steven Molnar is Head of Research and Education for Resimax group. With over 25 years in property and finance in Australia and internationally, he brings a unique perspective to each interview with interesting guests and property insights. Resimax group is one of Australia’s largest private property developers, Resimax Group Investor is headquartered in Kuala Lumpur MY.