In a landlord’s market, tenants face a double whammy: slim pickings in property and a rent hike this year, reports Maurice Dunlevy
THE good times roll on for landlords, but spare a thought for their hapless tenants. That’s because the flip- side to Australia’s lowest residential vacancy rates in two decades is an expected 15 per cent rent hike during the course of 2008 as investors cash in on nearrecord rental property shortages, and pass on their higher borrowing costs.
And paying more isn’t the only big issue confronting Australian renters.
A bigger challenge could be finding a roof to put over their heads in stock- starved rental markets where recent official and unofficial interest rate hikes and 5 per cent gross yields have done little to restore investor confidence that’s been in short supply since the 2004 housing collapse.
In Queensland alone, 30 per cent of all new apartment projects were abandoned last year on the back of poor pre- sales and tougher developer lending criteria, so it’s no accident that landlords are doing best in Brisbane.
Strong interstate migration and a booming jobs market have led to Queensland’s shortfall.
It isn’t the only state with a rental housing shortage.
For the rest of Australia, overseas migration is fuelling record demand for rental accommodation at a time when 25,000 fewer new homes will be built than four years ago. In Sydney in February, vacancies fell below 1 per cent for the first time,
The 2004 end to the housing boom saw 174,000 homes built across Australia. At the same time, about 100,000 migrants arrived on our shores.
This year, like last, 150,000 new homes will be built, but migrant numbers will total about 180,000.
A similar take on the rental market comes from property analysts RP Data.
In the 10 years between 1996 and 2006, Australia’s total private housing stock increased by 16.9 per cent, but the number of dwellings rented through real estate agents increased by 39.9 per cent as housing affordability became an issue in all parts of Australia.
Unwilling renters, according to RP Data research director Tim Lawless, are now in the lose- lose situation of not being able to afford a mortgage and having to pay higher rents.
Lawless says that in Sydney, where servicing a mortgage now consumes 38 per cent of average family income, house and unit rents have risen 12.7 per cent and 12.9 per cent respectively over the past year.
Nevertheless, in virtually all areas around Sydney it is still much more affordable to rent a home than buy one, with weekly interest payments greater than rents, particularly in affluent parts of the harbour city.
He says the Canterbury- Bankstown region is the only part of Sydney where renters have a chance to save money by buying, with average rentals of $ 340 a week compared to an average loan repayment of only $ 306.
Lawless says that historically, there has been a balance between rental and mortgage rates.
‘‘ When rents get too high, people will buy a home,’’ he says.
In Sydney’s outer suburbs, rents are increasing but house prices aren’t moving.
‘‘ People are getting rental yields of 6 per cent in some of those outer areas — and it is in some of these suburbs that people are likely to shift from renting to buying,’’ he says.
Lawless says the outer west was caned during the Sydney housing downturn, with no house price growth since 2004.
He says the region now shows rental yields of 5.5- 6 per cent. Despite rising interest rates, Lawless believes 2008 could see a resurgence of investors in the housing market.
‘‘ There are areas like Campbelltown and Camden that are earmarked for residential growth.
‘‘ Someone thinking about spending $ 1 million on a beach house may be better buying three homes there; there’s better rental potential and medium to long- term growth.
‘‘ From a tenant’s perspective, I think a lot of tenants will try and lock in their leases for at least a year.’’
In Brisbane, researcher Michael Matusik predicts a similar trend as tenants attempt to stave off rent rises. Brisbane’s current average residential lease term is only 13 months, but according to Matusik, in Brisbane and other capital cities there has already been a move to commercial- type leases where residential tenants sign for two years, but potentially stay for four through two- year options.
He says such leases commonly contain rent rises fixed to Consumer Price Index movements, plus 1 per cent.
‘‘ Real estate agents don’t like it because they make money from changing tenants, but investors do because they like secure tenancies and are willing to trade off returns to get them.’’
Matusik says recent research indicates Brisbane now has one of the tightest markets for rental accommodation in Australia.
A 2007 study in an already tightening inner- Brisbane market found 59 per cent of rental properties had one or more spare bedrooms, which is the type of shared accommodation popular with singles wanting to live close to where they work in the CBD.
A year on, and a 10 per cent rent rise later, there are virtually no empty bedrooms in inner Brisbane, particularly around railway stations, a situation with dire consequences for renters, according to Matusik.
With rental vacancies now down to 1.5 per cent, he sees no let- up either this year or next, with likely rent rises of at least 15 per cent, and possibly more.
After a decade of limited rental growth, Matusik believes tenants have the capacity to pay more.
Last year, a Matusik study found tenants spent only 26 per cent of their income on rent, significantly below the 30 per cent- plus repayment threshold commonly accepted as the point of mortgage distress for home buyers. Like other experts, Matusik blames Brisbane’s rental accommodation crisis on a 20 per cent shortfall in the number of new homes being built across Queensland.
He says the shortage is being felt across the state, but inner Brisbane and the Gold Coast are the most affected.
Robert Mellor, managing director of economic researcher BIS Shrapnel, predicts significant social changes from the housing shortfall.
‘‘ We’re going to continue to see a higher proportion of young people living at home with their parents, or in group households, because they can’t afford to pay higher rents,’’ he says.
‘‘ Basically we haven’t built enough homes since 2004 and, since then, it’s been a shuffling of the deck chairs.’’
With NSW construction at its lowest ebb in 28 years, Mellor says it is difficult to see a quick recovery, although rising rents will be an incentive to investors.
Nevertheless, over the next 18 months, BIS Shrapnel predicts no change to the number of houses and apartments being built in NSW, and only a slight improvement in Queensland.