Rents rise as investors exit
There has been a seasonally strong increase in weekly rents across the country this year, with CoreLogic’s first Quarterly Rental Review for 2019 showing rents have gone up in every capital city bar Darwin, as well as many regional areas over the first quarter.
National weekly rents rose by 1% between January and March, which was the highest increase in 12 months. Hobart led the pack with an increase of +3.6% over the quarter, following by Perth (+1.8%) and Canberra (+1.5%). Darwin’s rents fell only slightly by -0.3%.
This result hints that the rental market might be tightening as less investor activity across the country starts to have an impact. Investor activity has decreased due to lending restrictions.
Initially, lending restrictions were only targeted at investors. In 2014, APRA introduced a limit on how many new investor loans banks could issue, followed by a second measure in 2017 limiting interest-only terms (preferred by investors) on new loans.
(Since then, the Royal Commission has led to increased credit caution across all lenders for all types of borrowers, so both investors and owner occupiers are now affected.)
As a result, investors have steadily left the property market. Latest ABS figures published by CoreLogic show investor activity has fallen to 18.2% nationally, well down from 30% in 2014 and well below the decade average of 25%.
As a consequence, it appears that rents are starting to rise. Less investor activity means less supply of rentals to provide homes for the 30% of our growing population that either chooses or is forced (out of financial circumstance) to rent.
Here are the figures from CoreLogic.
Rents rise in 2019
Sydney
Median rent: $582 per week
Rents up +0.5% in March 2019 quarter
Rents down -3.1% over the year
Canberra
Median rent: $550 per week
Rents up +1.5% in March 2019 quarter
Rents up +3.6% over the year
Melbourne
Median rent: $454 per week
Rents up +1% in March 2019 quarter
Rents up +2.1% over the year
Brisbane
Median rent: $436 per week
Rents up +0.8% in March 2019 quarter
Rents up +1.4% over the year
Perth
Median rent: $385 per week
Rents up +1.8% in March 2019 quarter
Rents up +2.1% over the year
Adelaide
Median rent: $386 per week
Rents up +0.8% in March 2019 quarter
Rents up +1.2% over the year
Hobart
Median rent: $453 per week
Rents up +3.6% in March 2019 quarter
Rents up +5.4% over the year
Darwin
Median rent: $458 per week
Rents down -0.3% in March 2019 quarter
Rents down -5.7% over the year
Source: CoreLogic Quarterly Rental Review, March 2019
What’s happening now is a precursor to what we can expect there are changes to negative gearing post the federal election.
Should negative gearing be removed for anyone purchasing an established property for investment after January 1, 2020, we will see a further decline in investor activity. That means softer sale prices, particularly for apartments; and rising rents.
There will be a big impact in Sydney and Melbourne especially, where property values make it almost impossible for many borrowers to invest with neutral or positive cash flow.
Negative gearing is a tax benefit that investors get to help them manage losses each year. But it does encourage increasing rental housing stock to serve a continually increasing population.
Other options that require less capital are likely to become much more appealing to future investors. While they flock to shares, bonds or managed funds, we will lose valuable rental housing. That means renters – the young and/or lower to middle income earners will pay the real price for this policy.
Of course, rising rents have a flipside. It might be bad news for tenants but obviously great news for existing landlords.
The Quarterly Rental Review revealed a national gross rental yield of 4.1% for the first quarter of this year, compared to 3.95% in the December quarter and 3.77% a year ago. This is the highest national yield recorded since May 2015.
Across the combined capitals, the average rental yield is up from 3.5% a year ago to 3.8% today. Regional yields are much higher at 5.1%, up from 4.9% a year ago.
Nationally, the median rent is $436 per week. The combined capital city median is $465 and the regional median is $378. Sydney is the most expensive at $582 per week.
While investor activity has been declining, first home buying has been picking up with more than 110,000 young Australians buying their first homes in 2018.
Various stamp duty savings across the states and the national super saver scheme have led to the highest number of first home purchases since 2010.
There is now a proposal on both sides of politics to fund a new national equity scheme that would allow first home buyers to buy their first property with just a 5% deposit, subject to property price caps on a region-by-region basis.
It seems to me that rising rents plus more government assistance for young buyers should further boost first home buying activity across the country.