The new phase of rental price growth

Do you know the last time that our rental vacancy rate was one per cent? Well, it was way back in 2006, according to new data.

According to SQM Research, it’s been 16 years since there were so few residential properties vacant across Australia, plus the current number of vacancies represents only half the number reported a year ago.

Sydney’s vacancy rate is now just 1.6 per cent, Melbourne’s is 1.9 per cent, and in Brisbane’s it’s a super-low 0.7 per cent. The situation is even more dire in our smaller capital cities, where vacancy rates are all below one per cent.

Now, to put these figures into perspective, a vacancy rate of three per cent is the commonly accepted equilibrium point of balance and supply in a rental market.

This means that a percentage than starts with a “one” is a sign of a market suffering from a significant undersupply of rental properties. It goes without saying, then, that a vacancy rate that is less than one per cent is experiencing a critical shortage.

With such an undersupply of rental properties available, it is no surprise that rents are soaring around the nation.

Over the year to April, capital city asking rents skyrocketed by 14.7 per cent for houses and 11.2 per cent for units. Brisbane recorded the largest jump in asking rents over the past year– with houses jumping an extraordinary 21.2 per cent and units up more than seven per cent.

Market cycle mechanism

The unusually strong property price growth that we experienced last year is starting to moderate – as it was always going to do as markets moved into different phases of the cycle after such a rapid price uplift.

However, some investors appear to be treading water this year, even though there is generally more stock on the market than last year, prices are softer, and competition with other buyers has reduced.

Their argument seems to be centred around these changing market conditions, when it is actually a better time to buy now than it was last year for all of the reasons I have mentioned above.

Market cycles have four distinct phases – boom, downturn, bottom, and rising – with each period lasting different periods of time, depending on a number of factors, such as affordability.

But after a boom market cycle, there is usually a period when rents begin to increase so that yields start to improve, given property price growth had reduced them for a while (for new investor entrants into the market that is).

The strong rental growth of last year is unlikely to be a flash in the pan, either, given that the volume of investors active in the market over recent years was lower than normal.

According to CoreLogic analysis, investors comprised 32.6 per cent of mortgage demand by value in January 2022, up from a recent record low of 22.9 per cent in 2020, but still below the decade average of 34.9 per cent. 

Investment activity started reducing from 2017 because of lending restrictions that prevented many investors from securing finance around the nation.

That fall in historical investment activity has created the current undersupply of rental properties, which is a situation that is not likely to remedied anytime soon.

I believe rents will keep on increasing for some time because we simply don’t have the supply of rental properties available to house our current population – let alone the imminent return of overseas migrants. Likewise, rising interest rates will add more fuel to the rental price fire.

With these sort of factors at play, there really has never been a better time for savvy investors to secure a strategic real estate asset to hold over the medium- to long-term will enjoy rising cash flow along the way

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