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Is Sydney heading for a rental crisis?

Investors knocked out.

An idea seemingly out of left field given record dwelling completions in Sydney, but stick with it. Sydney property market

Despite record apartment construction in 2016, the rental market is ultimately governed by the supply of rental properties on the market and the demand from tenants, not the absolute number of properties built.

Sydney is a city with an unusually high demand for rentals, for a few reasons.

Firstly, because it’s an expensive city to buy a home to live in, and in an era where job stability is far less common most inhabitants will be a part of the rental market at one time or another (if nothing else the high rates of stamp duty ensure this).

Sydney can also be a transient type of place – the harbour city attracts the most migrants from overseas, but also loses the most incumbent residents interstate or to the regions of New South Wales.

This is a dynamic which leads to a high rate of churn and lots of tenancies.

As home to the strongest economy in the nation in recent years, the annual rate of net overseas migration into New South Wales has been accelerating again, from 50,000 in 2010 back up to to more than 76,500 at the last count in September 2016.

Overseas migartion

And then there is the unprecedented boom in the number of international students.

International students

At the same time, a significant crackdown in lending to investors is underway, with a credit squeeze and rates being hiked on investor loans, while investors increasingly starved of credit are beginning to turn their interest to cheaper markets upstate or interstate.

Changes announced in the state budget were designed to bring more first homebuyers into the market in their stead.

Domain Group reported this week that apartment rents have increased by 17.4 per cent in Sydney over the last five years, with the growth in apartment rents topping 20 per cent in half a dozen sub-regions.

Sydney rents

Sydney may not be at full employment just yet, but with an unemployment rate of just 4.4 per cent it’s been getting pretty close, and we know from historical experience that this tends to bring a high demand for rental properties.

Unemployment rate

Sydney also has a track record of seeing rental prices spike when demand for investment properties falls sharply, such as from 1985 to 1988 (negative gearing ban), and in 2008 (financial crisis).

A post to bookmark and watch over the next year.

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About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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