With rental property availability at critical levels, a social ‘tug of war’ is in play with investors held to account over rising rents.
The availability of affordable rental property is an issue that extends beyond the welfare of individuals to the broader economy. Around one third of Australian households rent either in the public or private market; a figure that has increased over the last decade predominantly on the east coast.
Is property worth it for investors?
CoreLogic reports that rental property vacancy rates across Australia declined to an historic low of 1.1% for the first three months of 2023. And, rents have escalated 10.1% nationally over the 12 months to 31 March 2023. It should be a great time for investors. But, the volume of residential loans to investors has declined by 32.6% across the year (ABS Lending Indicators) and the number of existing investors selling out of residential property has risen by around 5%. Investors are increasingly more inclined to seek returns elsewhere.
When inflation is factored into rental income growth, the picture is not so rosy. The Reserve Bank of Australia (RBA) states that the average rate of increase in rents over the past decade has been relatively weak with rent inflation increasing at an average rate of 1% per year since 2012 (measured by the ABS CPI). Hobart is the exception where rents have increased by 3.4%, but Perth and Darwin experienced negative growth over the 10 year period at -0.4% and -0.6% respectively.
And, while real weekly rents rose by approximately $48 per week between April 2022 and March 2023 across Australia, the average weekly investor mortgage repayment on the typical Australian dwelling increased by $184, leaving investors $136 per week worse off*. So, while rent increases are putting pressure on tenants, it is leveraged investors who are bearing the brunt.
Gross rental yields to December 2022 are sitting at around 3.78% nationally*. But gross yields don’t consider the ongoing costs of the investment property such as interest, rates, repairs and maintenance etc., that further reduce the yield. While for negatively geared high-income investors, some of the benefit is in the ability to utilise the losses to reduce assessable income, the impact on cashflow throughout the year needs to be factored in.
Most investors however don’t look solely at the yield but the capital gain and understandably so with the ABS reporting that property prices increased nationally on average by 23.7% across 2021. But with the changes to credit conditions in 2022 and 2023, the market has declined nationally on a year on year basis.
Limiting rent increases
In March, the Palaszczuk Government announced its intention to limit rent increases to once every 12 months (from 6 months) to bring the State into line with NSW, Victoria, South Australia and Tasmania. Western Australia and the Northern Territory allow rental increases every six months depending on the term and nature of the rental agreement. The ACT is the only State or Territory to limit rent increases - the amount a landlord can increase rent is limited to 110% of the CPI. In other jurisdictions, landlords have the right to set the dollar value of rent within timing and contract restraints. Tenants have the right to contest the rental increase before a tribunal but the onus is on them to prove that the increase is excessive. An option few utilise.
The bottom line
Historically, renting is more common among 25 to 44 year olds but over time, the share of older households renting has escalated. While the number of individuals in higher income brackets renting has increased over time also, in general, households that rent earn less than owner-occupiers. The age and earning capacity of renters also means that they spend a greater proportion of their income on basic living expenses and have lower savings buffers to weather increases.
Rental property is a public good (like banking) and the availability of affordable, quality rental stock is important. But for investors, is investing in residential property and expanding the available rental stock for the good of the country worth it? It really depends on your individual scenario and your investment objectives. So as always, seek advice from a professional when considering your options.