why we’re in a perfect storm
I recently attended an insightful session by Tim Lawless, the founder and research director of CoreLogic’s Asia-Pacific research division. I came away questioning why the market has changed so dramatically.
Vacancy rates in some areas of Australia are well under the national average of 1.5 per cent (South Australia is at 0.3 per cent), which is putting undue pressure on families looking for a home to live in.
The low vacancy rates have led to rent increases of between five per cent and 12 per cent in 12 months, exasperating an already difficult situation.
One might assume that the culprits are greedy landlords cashing in on the situation. Although such individuals do exist, in this case it is a straightforward case of economics: high demand + low supply = rising prices.
Rents are typically set by market conditions, so if the situation was reversed and the market was oversupplied, the market response would be a drop in rents as landlords work to secure tenants.
Many landlords are family investors who have supplemented their retirement income through buying a single investment property. Only a small number are corporate investors or investors with a large rental portfolio.
So, why has there been such a drop in the number of rental properties available?
I would say that we are currently in the middle of a perfect storm.
What’s causing the perfect storm?
Over the past few years, various legislation has been introduced to make the rental market more favourable for tenants. For example, in some states, a landlord cannot refuse a tenant wanting to keep a pet or require a property to be kept at a certain standard.
At face value, these changes may seem fair and reasonable.
However, these changes are taking away the property owner’s right to rent their property as and when they see fit, as well as costing them more to ensure the property is up to code and maintained at that level on an ongoing basis.
In some states (like South Australia), land tax has gone up astronomically, thereby dramatically affecting the cost of holding an investment property.
Builders are struggling to obtain building supplies and product prices have increased, which has pushed the average home cost up by nine per cent in the past 12 months.
The building experience has become slow and expensive, placing more pressure on the established home market across the country.
Now placing above conditions in a growing sales market, with prices rising in some areas by around 20 per cent for the year, we start to see the perfect storm scenario unfold.
The expensive sales market is predominantly due to the lack of properties on the market available to buy, as well as extremely low interest rates for borrowing money, even with the current trend upwards.
The increase in property prices (and potential interest rate hikes) is making it more difficult for investors to buy into the market, because the high prices being paid has reduced the return they can expect to get, even with the current increased rent levels.
Some investors have elected to sell their investment properties and cash up to take advantage of the high sales prices, moving their funds into other investment vehicles.
Property for many, has become too hard, with not enough return for the risk and trouble.
As a rent roll broker, I assess the value of agency practices around the country to prepare them for sale.
I have witnessed many of my clients losing a significant proportion of their rent roll portfolios over the past 12 months. And all because of this perfect storm.
How do we fight the storm?
It all boils down to supply and demand.
A good start would be if government took proactive action to encourage investors back into the real estate market.
When investing in real estate becomes attractive again, providing a fair return for investment, investors will return, providing more homes to rent and alleviating the pressure on the current market for both renters and buyers.
As supply increases, the changing market conditions will bring rent levels back under control.
It is impossible for our government (regardless of who is in power) to supply the amount of housing that is required to fix the current situation.
The solution needs to be driven and supplied by market forces. This can only be achieved with incentives to invest in real estate being maintained and guaranteed for the long term.
Stamp duties down
The biggest incentive government could provide is to reduce the stamp duty on purchasing properties.
This pseudo tax is one of the key costs inhibiting home ownership, as well as investment.
The sooner stamp duty is reduced to a more manageable level, the better it will be for everyone.
In the long-term, the government will still win, because with every house bought and sold, the economy is strengthened.
People will be better off, which improves their financial situation and wellbeing. There will be stability for families through the security of accommodation and home ownership.
The right to write-off
One of the other incentives that need to be affirmed as secure by our politicians, is the right for investors to write-off and depreciate their assets.
Every property needs to be maintained, and this is a cost that will continue through the life of a property.
When owners are permitted to claim these costs, there is an incentive to keep the property up-to-date, providing tenants with a property that is in good condition.
I believe that we can weather the storm and come out stronger on the other side, but we urgently need decisive action from the top.
My hope is that there will be politicians out there prepared to take up this cause and to assist in creating the right market conditions to alleviate this perfect storm.