Good news for investors as house rents set to rise

As Australia’s property values continue to rise onward and upward, it would seem rents are set to head in the same direction – and at quite a rapid rate.

Tenants who may have been keen to get into the housing market, but were having difficulties due to affordability issues and rising interest rates will soon be hit with the double whammy of rising rents, as landlords get set to enjoy the benefits of a “rental boom”.

The recent Global Financial Crisis has compounded the rental accommodation crisis that had already caused vacancy rates to drop to unprecedented lows right across our major capital cities. This is largely because wary developers were concerned as to where the property market was heading and whether there were profits to be made given the economic uncertainty that all of us were feeling. As a result, they simply stopped building new supply.

It is no big secret that we have an accommodation undersupply that is becoming more and more critical in Australia, and this lull in new development has only added to the hurt when it comes to the availability of rental stock.

Of course all of this increasing pressure on housing demand, combined with a lack of new stock hitting the market, is forcing rents to soar to all time highs, particularly in the prime sought after inner city and bayside areas of Melbourne.

According to data from the Real Estate Institute of Victoria, overall residential vacancy rates in Melbourne were at 1.6% at the end of last year and have not moved above 2% since before 2007.

However, the REIV says a vacancy rate of around 3% is ideal; being tight enough to ensure decent returns for landlords, while still providing tenants with a good selection of affordable accommodation options.

As a result of this tightening supply, figures from Australian Property Monitors reveal that rents rose by a whopping 15.8% for houses and 16% for units over 2007, breaking all previous records, and by a further 9.1% for houses and 10.3% for units across 2008.

This meant an enormous jump in the average weekly rent Melbournians were paying from $285 to $360 for houses and $250 to $320 for units. Of course the GFC also saw a period of uncertainty surrounding employment and the overall Australian economy and this new climate saw rents stabilise and vacancy rates increase (albeit slightly). APM reported that rents remained at $360 per week for houses in 2009 and only jumped by $15 for units to $335.

This occurred for two reasons. Firstly, the government introduced more incentives for first home buyers in the form of an increased home owner’s grant to help stimulate spending and the economy. This, combined with record low interest rates, had the effect of pushing a large wave of tenants into home ownership and out of the rental loop.

And secondly, many would be tenants (ie. School leavers and university graduates), decided to stick it out at mum and dad’s place or seek share accommodation rather than take on the responsibility of high rents in a still undersupplied market during such an unstable economic period.

Of course now we have entered a new financial era. Confidence has largely returned in the Australian economy, our property markets have held their own and weathered the GFC with surprising resilience, unemployment is returning to more “normal” levels and wages are on the rise.

Additionally, landlords who are being stung with increasing interest rates are looking to cover their growing mortgage burdens with higher rents. The REIV predicts that vacancy rates will also start to tighten once more in 2010, as our rapidly growing population and continuing undersupply of housing sees demand for rental accommodation once again exceed supply.

As a result rents will start to climb, with APM forecasting an increase over 2010 in average weekly house rents of 5.6% to $380 and for units of 7.5% to $360. Some seasoned real estate agents are even suggesting that in the more sought after inner city suburbs of Melbourne, such as Elwood and South Yarra, rents could rise by as much as 10%.

Although some tenants might start to contemplate home ownership as a better option due to increasing rental affordability issues, the truth is many have been priced out of the property market in their preferred areas and as interest rates rise, mortgage repayments on prime real estate is simply not an option for the vast majority of young renters.

While all of this spells less than welcome tidings for Melbourne renters, landlords can rejoice in the fact that the recent growing cashflow shortfall many investors are having to cover between rental income and rising mortgage repayments will soon start to shrink back to more attractive levels.

The key take home message for investors is to keep on top of rent reviews throughout 2010. There will be opportunities to increase rentals, particularly in those inner city areas that young tenants find so appealing for lifestyle reasons, and in order to effectively manage cashflow those opportunities need to be taken.

Here at Metropole Property Management, we conduct annual rent reviews on behalf of our clients to ensure they are achieving the optimum rental for their property. If you are considering buying an investment property or you are already an investor and are looking to change property managers, why not call us at Metropole on 1300 20 30 30 to find out how we can help you, or click here for further information about our services.



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Pamela Yardney

About

Pamela was a founding director of the Metropole Property Group. She co-authored the top selling book "The Australian Guide to Buying & Selling Your Home." In her articles she freely shares her years of experience as a property investor & developer and a property management expert. Visit Metropole.com.au


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