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Rents to increase as interest rates rise

Is there any relief on the horizon for Australia’s embattled tenants? With ongoing talk of inflated house prices pushing home ownership further and further out of reach, it seems that many would-be home buyers will remain trapped on the rental roundabout; forced to deal with rising rents over 2011 and beyond.

RP Data predicts that rents across capital cities are set to climb by 7% this year, on top of the additional 4.2% average increase renters were hit with last year.

If renters were hoping these predictions were an extreme and unlikely scenario, the December 2010 quarter data will not come as welcome news. During this period, Melbourne’s median house rent went up by 2.9% to $360 per week, while Brisbane and Perth tenants were forced to pay an extra 1.4% ($365 per week) and 1.3% ($385 per week) respectively. Sydney was the only capital city where renters enjoyed a reprieve, with rents for houses remaining static at a median of $450 per week.

Further investigation from RP Data revealed that during the past five years, tenants across Australia’s capital cities have been forced to cough up an additional 44.2% on average for the privilege of renting a house, with the overall median price now sitting at $375 per week.

According to RP Data analyst Cameron Kusher, this year’s forecast rent rise is expected to be more consistent with the average five year trend rather than the cooler conditions experienced across rental markets during 2010.

So why can tenants expect to be paying a lot more by the end of the year? 

Quite simply, demand for rental accommodation is set to increase further as affordability issues keep many potential first home buyers locked out of the property market and supply constraints continue to plague most inner city areas.

Add to this our continuing population growth and a notable downturn in the construction industry and, as the Reserve Bank suggests, the strain on demand will get far worse before it gets any better.

In minutes from their October 2010 meeting, the RBA says the slowdown of household borrowing and cooler property prices was a “welcome development,” however, “there were some signs that the rental market was tightening again.”

The statement from the Central Bank goes on to say, “The tightness in the rental market was 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.”

Then of course there’s the issue of interest rates, which are threatening to creep up further as inflation is set to rear its ugly head by the middle of the year.

Talk about making it tough to get onto the property ladder and out of the rental rat race!   

Kusher expects that the inner city unit and apartment market, along with more expensive outer metropolitan areas, will see the strongest surge in rental prices as continuing low vacancy rates tighten further over the coming months and renters are forced to consider smaller, more affordable housing options.

While Australian Property Monitors Anthony Ishac, says many will have to compromise on the location they can afford and move further from inner city areas into outer suburban commuter belts.

Of course this will only add to the financial woes of tenants who will have to pay for longer, more expensive travel alternatives to and from work.

Ishac notes that with the market returning to a pre-GFC mindset, rents will again start to rise on a regular basis; “It wasn’t uncommon for rents to be increased every six months, and because there is so much demand it puts the power in the hand of the landlord.”

According to the Housing Industry Association, lengthy delays between obtaining finance and building approval remains a big concern for developers and is keeping a lid on the construction of much needed new stock to a large degree.

The only city that is not feeling the pinch is Melbourne, where an oversupply of new CBD apartments is on the cards for this year and 2012. But most young renters don’t necessarily want to be right in the thick of things when it comes to inner city living, instead favouring suburbs within about a ten kilometre radius and around popular bayside areas. And it is here where Melbourne tenants will continue to find the competition tough, as rental prices creep beyond the reach of many.

Of course this grey cloud that persists in casting a nasty shadow over the future of young renters means good news for investors, who will be forced to find more money to cover rising interest rates later in the year.

With prices expected to remain stagnant over 2011 and the possibility of some minor corrections, yields will start to look a lot healthier as regular rent reviews see many landlords enjoying consistent increases in their rents.

In turn many investors can expect to see their portfolios become neutrally geared, if not producing some surplus cashflow, as their monthly rental income catches up with rising mortgage commitments.

The key is to keep on top of your tenancies and ensure that you have a pro-active property management team looking after your investments. They need to be constantly in touch with what’s happening in your local marketplace and keep their finger on the pulse when it comes to reviewing the going rent on your property when the opportunity arises.

Now is also a good time to review your investment strategy and really take note of how our ever-tightening rental market is changing the way young tenants choose to live. Where once bigger was better, affordability is now the critical factor influencing the decisions as to where and what our younger Aussies rent.

Over time, I expect we will see more tenants opting for smaller, medium to high density living in those inner city areas that will always hold a high level of appeal, as well as share accommodation becoming an enticing option for those who have no choice but to divvy up the extra weekly cost of rising rents.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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