Investors to face 3-year squeeze

Investors to face 3-year squeeze

By Jack Needham

The after-effects of extreme value rises are beginning to reverberate throughout Australia’s capital cities, with no end in sight.

Australia’s rental growth over the past 12 months is at its lowest on record, according to CoreLogic RP Data figures released yesterday, with Sydney and Melbourne set to continue feeling the pain beyond the new year.

Figures released today indicate that rents across Australia’s capital cities rose by 0.3 per cent over the 12 months to November, to sit at $486 per week for houses and $464 for units.

Of all of Australia’s capital cities, only Sydney and Melbourne recorded an increase above two per cent, but even that figure represents a significant slow-down, CoreLogic RP Data’s research analyst Cameron Kusher said.

“Sydney and Melbourne, which have seen the largest ramp-up in new housing supply and investor activity over recent years, continued to record rental rises over the past year. However, each city is seeing a slowing in the pace of rental growth relative to 12 months ago.

“It is clear that the increase in investment stock continues to provide landlords with little scope to lift rental rates while the low mortgage rate environment provides little incentive to push yields higher,” Mr Kusher said.

Cam McLellan, director of OpenCorp, explained that, based on historical market performance, rents in Australia’s two largest cities will stagnate for up to three years as each market adapts to the mass of new housing stock hitting the market after the boom period.

“Based on development activity, those two cities had strong growth. So the amount of development that comes on over the next few years [will affect rent prices]. It takes about three years after any strong growth curve for prices to correct and come back," he said. 

“It’ll take a little bit of time before pressure gets on supply enough again in the rental market, because obviously we’ve got a lot of investors building things and thinking that’s fantastic because of the price growth, so that gives a slight oversupply. After every boom period you get an oversupply, which obviously means that rents don’t get pressured to come up," Mr McLellan added.

“So what you’ll see now is developers moving to other locations to do their development and, once developers are out of the city, demand keeps pressuring on and after a couple of years, all of a sudden up comes the rental prices again.”

Although the news may be sobering for many investors, Mr McLellan predicted that low interest rates would continue to soften the blow of a slow marketplace.

“When people factor in rental growth, there are two factors that influence it. There’s the price of property and interest rates. Because interest rates are so low, it’s not costing as much for an investor to hold a property, so we haven’t seen the pressure on investors to really jack up rents,” he explained.

The comments follow predictions from Andrew Schwartz, managing director of real estate investment management firm Qualitas, that Sydney and Melbourne are set to experience an oversupply of housing stock in 2016.

“Certainly there’s potential for some level of over-supply in the market, I don’t necessarily believe that leads to substantial price correction, but I can definitely see a world where the residential market takes a few sideways steps over a period of time while we see that underlying demand through migration and changing trends in the marketplace absorb the level of supply coming into the market,” Mr Schwartz said earlier this week.

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Investors to face 3-year squeeze
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