Australia’s rental crisis looks set to worsen further as fearful investors offload their properties and abandon certain markets in Queensland and Victoria.
New research by the Property Investment Professionals of Australia (PIPA) shows a maximum exodus of property investors in the two states over the past 12 months, with sales of rental properties surging both in the state’s capitals and in regional markets.
The data reveals that 24.8% of investors who responded to the PIPA annual sentiment survey sold one or more properties in Melbourne over the past year, while 23.3% sold in Brisbane.
Outside of the capitals, 16.4% sold in regional Queensland and 6.4% sold in regional Victoria.
At a state-wide level, 39.8% of investors sold one or more properties in Queensland over the past year, while 31.35% sold in Victoria – dwarfing the results in all other jurisdictions, according to the 2023 survey.
For comparison, 8.9% of investors sold in Sydney, 5.9% sold in Adelaide, 6.4% sold in Perth, and 3.4% sold in Canberra.
Investors under attack
The key driver of this mass exodus is that investors no longer feel in control of their assets.
Despite price rises across much of the country in recent months, positive market conditions were a motivator to sell for just 29.2% of investors – down significantly from last year.
Restrictive legislative changes have taken place, or are on the agenda, across Australia have caused a staggering 38% of investors to indicate they might sell a property over the coming year, with the top reason being governments increasing or threatening to increase taxes, duties, and levies (47%).
Investors cite that it’s the impending or proposed legislation, combined with much higher costs, which has made property a much less attractive asset to hold.
Changing tenancy legislation that impacts their control and increases their compliance burden and holding costs was cited as the key reason for selling.
In fact, these policy changes, which dramatically impact the viability of holding an investment property, even outranked rapidly rising interest rates (40.1%) as a main pressure for selling.
Talk of rental freezes, rental increase limits, or caps are also listed as major reasons for investors selling over the past year.
Meanwhile, negative cash flow due to higher mortgage costs (23.2%), a need to reduce total borrowings (33.1%), or offloading an underperforming asset (18.8%) were also cited stressors.
PIPA chair Nicola McDougall said that it's clear investors are selling up or avoiding buying due to attacks by governments disguised as reform that make owning a rental difficult.
Which is especially poignant at a time when much of the country is in the grips of a rental crisis driven by undersupply of homes and significant demand from tenants.
“At a time when tenants can least afford it, the people providing the vast majority of rental homes are selling up in droves,” she said.
Queensland still remains number one
While many investors have sold up their investment properties in Queensland, the state does continue to rank highly as an investment prospect over the next 12 months.
But while the Sunshine State came out on top (with 29.8%), this result is down from 33% last year and down a whopping 58% since 2021.
In fact, this year’s figure is the lowest percentage for many years.
But the data also shows that Western Australia continues to rocket up the rankings, taking out second spot with 28% of investors rating its potential prospects, a sharp jump on last year’s result of 17.8%.
Elsewhere, New South Wales was third at 19.4%, up slightly from 17% last year and South Australia was fourth with 14.9% of investors eyeing its potential.
Victoria was fifth with a very flat 4.7% of the vote – the lowest result ever and a dramatic plunge from last year’s result of 12%.
Meanwhile, when probed about the most appealing city to invest in last year, 35% of respondents picked Brisbane – the top result.
This time around, the Queensland capital (21.8%) has been comfortably overtaken by Perth (24%) but Brisbane’s falling status among investors is stark – in 2021, 54% of respondents put it on top.
More pressures are ahead
Unfortunately, tenants face more rental pain, with the proportion of investors who feel it is likely they will sell within the next year for a variety of reasons hitting 38% – a sharp increase from the 19.2% in last year’s survey.
“Should governments further increase or introduce new taxes and compliance costs, 47.2% of respondents said they would be forced to increase rents,” McDougall said.
Victoria has introduced a $5 billion land tax hike and removed caps on rental price increases or a rent freeze.
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Queensland, meanwhile, implemented, and then scrapped, a strange land tax grab last year, and rolled out capped rent increases with retrospective application this year.
And both states continue to talk about further punitive rule changes being on the agenda, which strips away surety from investors and makes owning a rental in Victoria and Queensland highly unattractive, she added.
A core characteristic of repeated attacks on investors in recent years, she said, has been to paint property investors as greedy and opportunistic.
“It’s unfair and unhelpful, especially given our research shows 92% of investors are grappling with higher holding costs because of interest rates, higher mortgages, and inflation,” McDougall said.
“Despite that, 55% of investors said they were passing on just 10% or less of these higher costs to their tenants.
Another 26.9% reported passing on 11% to 25% of extra expenses in the form of rent increases.”
But there is still an opportunity for investors
So is the glass half full or half empty?
I see all this as a window of opportunity for property investors with a long-term focus.
You see…we are at the beginning of a new property cycle, something that doesn’t happen very often.
Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.
Moving forward, demand is going to outstrip supply for some time to come as we experience record levels of immigration at a time when we’re not building anywhere as many properties as we require.
At the same time, the cost of construction of delivering new dwellings will keep increasing not only because of supply chain issues and the lack of sufficient skilled labour but because builders and developers will only commence new projects if they are financially viable, and currently new projects will need to come on line at considerably higher prices than the current market price.
Of course, in due course, consumer sentiment will rebound when it becomes clear that inflation continues to fall and interest rates have peaked.
At that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
And strategic investors will take advantage of the opportunities our property markets offer over the next couple of years maximising their upsides while protecting their downsides.
Now I'm not suggesting taking advantage of tenants, what I'm suggesting is to recognise there is currently a problem (lack of rental accommodation) and provide a solution.
Don’t try to time the market - this is just too difficult - don’t hunt down a bargain.
Just focus on buying an investment-grade property in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices…
Plus they’ll hold their value far better in the long term.
While it might feel counterintuitive to buy in a correcting market, you can also benefit from less competition, low consumer sentiment, having more time, and minimal risk of oversupply.
Remember, the rental crisis will only worsen further, with no end in sight.
Now would be a great time to buy an investment property and enjoy high demand while trying to be a part of the rental crisis solution.
Maybe others might follow in your footsteps.
