- Median Australian rent values rose 7.5% in the year to July
- Rent growth only half of inflation over the past decade
- National vacancy rate of just 1%
Much has been written about the increase in weekly rents recorded over the past year. Can investors wonder if 2022 is a better year for real estate investing than 2021?
According to CoreLogic, in the year to July, median Australian rent values rose 7.5%, representing the highest annual rent appreciation since December 2008.
However, some of this rent growth helped recoup the price reductions that took place in the first year of the pandemic.
Indeed, before the pandemic, rent growth had generally been benign, if not declining, for most of the decade – contrary to some media reports.
There were many reasons for this, including an abundant supply of investment properties and historically low interest rates.
But something happened in 2017 that started to upset that balance, with the introduction of lending restrictions primarily targeting investors. The Australian Labor Party was also threatening to scrap the negative-gear tax policy because of so-called “greedy” investors messing up the tax system (nonsense of course, but they did). This naturally made many investors reluctant to buy and increase the rental supply. Then we had floods and then bushfires which also scared investors away.
So, unsurprisingly, we saw the volume of investors active in the market begin to decline, as many simply could not obtain funding to transact or were put off by misguided parallel government fiscal policy planning.
The property boom in Sydney, and partially in Melbourne, in the mid-2010s had also added a huge supply of rental properties in these locations, which meant that rental growth was weak for some time. A huge influx of new offers in Brisbane has had the same effect.
However, by July 2019, that supply was absorbed, and investors were scarce on the land, so rents started to strengthen somewhat…until the pandemic hit, and they started falling again.
New industrial research
Indeed, new proprietary industry research has found that rents have only risen at half the rate of inflation for more than a decade, even after taking into account rent increases in the United States. previous year and current inflation peaks.
The Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA) have joined forces to shine a light on the financial reality for millions of property investors in the face of soaring property costs.
The research – using the Australian Bureau of Statistics’ Consumer Price Index from June 2012 to June 2022 – found that rents rose only 11% nationally over the decade, but that inflation rose 25.6% over the same period – a shortfall of almost 15% percent.
On an annual basis, rents have increased by about 1% per year, while average inflation has increased by more than 2% per year over the decade.
So you can see that rents haven’t done much for a long time, for the reasons I laid out at the start of this blog.
However, there are currently a number of moving parts upsetting this picture, which may lead to an opportunity for better real estate investing in 2022.
According to SQM Research, the national residential vacancy rate was just 1% in June – the lowest in decades, and investor activity is still below historical averages. And it’s no wonder given the bad reputation that investors continue to have.
This not only means that there are fewer rental units available to tenants, but that investors are still not adding the usual supply of rental stock, which means that the situation will continue to deteriorate for some time to come. .
As you are also no doubt aware, the heat is out of many real estate markets which is good for buyers and investors and we are also starting to see more stocks hitting the market.
Sure, interest rates are rising, but they remain at levels well below recent historical averages – outside of the emergency rate setting during the pandemic.
While any professional working on the buy side of a transaction lost ground last year, we were often very busy because there was so little stock available and many emotional buyers were paying ridiculous prices.
Now, however, not only have the markets moderated, but so have the prices sellers are hoping to achieve.
When you add the fact that there are also fewer active buyers, you can clearly see why now is such an opportune time for investors and homebuyers to begin – or continue – their real estate investment journeys.