Good news for landlords spells troubled times ahead for tenants

We’ve all heard the horror stories from tenants on the news and current affairs programs in the past few years as the worsening rental shortage made headlines; tenants queuing up along the entire length of streets just to attend inspections and tales of illegal bidding wars taking place to secure one of the few available vacant properties.

As vacancy rates dropped to record lows, rents began to increase significantly, however it seems the worst is yet to come for Australian tenants with renting set to become even more expensive.

A recent article in the Sydney Morning Herald quotes minutes from the Reserve Bank’s October 5th monetary policy meeting which suggest the rental market will tighten again as vacancy rates fall from already low levels.With developers choosing to sit on the sidelines of late, there is a shortfall of new homes being constructed which is compounding the already critical dwelling undersupply. In addition, our population is growing significantly each year to create greater demand on our already limited housing.

The RBA minutes point out that, “Tightness in the rental market (is) likely to persist given the ongoing strong population growth and the decline in housing approvals this year, and could be expected to feed into increases in rents.”

“Approvals for construction of apartments remained at low levels in most states, with Victoria a clear exception.”

Never mind unaffordable housing when it comes to breaking into the property market as a first home buyer, it seems that many tenants are going to find it increasingly difficult to secure rental accommodation at a reasonable price.

Commonwealth Bank economist Michael Blythe says the short term outlook for housing supply is improving, but as investors start to feel the pinch of rising interest rates it will once again “turn negative.”

“We’ve still got relatively strong population growth so the demand is still fairly tight,” Mr Blythe said.

As if this wasn’t enough for tenants to deal with, he adds that additional costs incurred by landlords will be passed on to their renters, including utilities and government charges.

“On the demand side, you’ve got the population story and you should have relatively strong income growth,” said Mr Blythe.

“Not only are there increased costs coming through for investors, but the amount of money that rental households could potentially have to pay for rents signals that there should be some (rental) increases coming through there.”

The future for tenants looks rather bleak, with the latest BIS Shrapnel property prospects survey suggesting that the rental market is likely to remain tight.

The report predicts that, “With vacancy rates in most cities expected to stay tight…rental growth in the five to seven per range is likely in the short term.”

“Rising prices and high interest rates over the past year may also keep tenants in rental longer while they accumulate savings to purchase a home.”

The report shows that Adelaide is the toughest rental market to crack, with a vacancy rate in June of just 1.1%, While Sydney and Melbourne vacancy rates were at 1.3% and 1.5% respectively. Rental growth has been strongest in Sydney and Melbourne, sitting at close to 10% for Sydney and 8.2% for Melbourne in June this year.

Sydney takes the title of most expensive city for tenants looking at unit accommodation and the second most expensive capital after Canberra for houses.

A recent report from Australian Property Monitors predicts, “Tight vacancy rates, together with a strong economic outlook, will lead more of the population into the rental market and inevitably into higher rents.”

Of course while all of this spells tough times ahead for renters, it is good news for investors seeking to bridge the gap between interest repayments and rental yields that will inevitably widen as the Reserve Bank tackles inflation.

The take home message for landlords is to ensure your property manager conducts regular rent reviews and keeps track of the going market rent in the area your investment is located in.


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