Rental Market Poses Threat to Investors

By Peter Sarmas on 15 May 2016
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Melbourne Auction Results 15th May 2016

73%
Clearance
Rate

708
Reported
Auctions

Sold at Auction: 420    
Passed in: 191  

 

Sold Before: 97    
Sold After: 0    
     

 

 

 

A clearance rate of 73 per cent was recorded this weekend compared to 72 per cent last weekend and 77 per cent this weekend last year. There were 708 auctions reported to the REIV, with 517 selling and 191 being passed in, 69 of those on a vendor bid. The west of Melbourne has seen a significant lift in auctions across a number of suburbs this year – including Taylors Hill (17 auctions) and Caroline Springs (16 auctions).

Our experince over the weekend reflected the sentiment of the market. We went to bid for an ‘A Grade’ two bedroom villa unit but did not even get our hand up for a bid. Quoted at $540-$580,000 we had conducted our due diligence and found market value up to $620,000 for our investor buyer. Beyond this price we would be paying too much for this type of property in the area, but that didn’t seem to matter. Four different bidders joined the bidding until in the end it was the first home buyer being outbid by the downsizer, the final price a whopping $633,000. The highest price paid for that type of property in the area.

A chronic shortage of ‘A Grade’ property is certainly pushing prices up, pending election or not!

 

Source: Shuttesrstock

 

Rental Market Poses Threat to Investors

The latest CoreLogic April rent review released last week shows rents increased slightly (0.1%) in April, however overall , capital city rental rates edged lower, falling 0.2% over the past 12 months. The report showed five of the eight capital cities saw a modest rise in rents with Sydney rising 1.4% and Melbourne 1.7%. Perth and Darwin saw the biggest rent declines, 8.9% and 12.9% respectively.

According to Corelogic’s Research Analyst Cameron Kusher “We anticipate that the weakness in the rental market will persist over the year and rents will continue to fall over the coming months. The annual change in rental rates continues to be at its slowest pace since before 1996.”

“At the same time last year, rental rates increased by 1.7% which indicates a sharp slowdown in rental growth over the past year.”

“Factors contributing to a slowing in rental growth include falling real wages, excess rental supply in certain areas and lower rates of population growth – all of which have impacted on demand for rental accommodation.”

“With dwelling approvals at recent record highs and construction activity set to peak over the next 24 months, accompanied by many new properties still to settle, we anticipate that the weak rental market conditions will persist with rental growth continuing to slow and, or, fall in most capital cities.”

“Based on current market conditions, landlords won’t be in a position to lift rental rates and may actually need to reduce rents in order to keep their tenants. We see renters as holding a stronger negotiation position and where they now have the potential to upgrade into higher grades of accommodation for a similar, or lower rents,” Mr Kusher said.

The latest REIV Vacancy Rate 12 month data shows where in particular the problems lie. These seem to be in the inner Melbourne (0-4km) and Middle Melbourne (10-20km) with the latter showing some improvement.

Worth mentioning also is the deterioration of many regional areas measured by REIV. Most notable were, East Gippsland, Ballarat and Central Highlands, Wimmera, Warrnambool and Western District. All regions showed increased vacancy rates for the year, since April 2015.

Speaking to a number of property managers over the weekend, they all had similar stories. There are strong signs that new developments are impacting established units across the board, these same developments are also impacting established and nely completed aprtament prices. Tenant numbers are thin on the ground at the moment.

Landlords will need to carefully review their investment properties before raising rents as they have in the past. Losing a good tenant in today’s market could lead to an instant decline in revenue and the longer than usual wait for a new one. My advice is to look at offering a longer term tenancy with little or no rent increase so as to ride the aprtment glut expected over the next few years.

With falling interest rates, it may also be time to pay down some debt and build some savings for that rainy day.

 

Property Industry takes a shot at the Labor Government’s Policy

On Friday over 20 real estate companies and industry groups  joined forces and signed off on a campaign which will target renters, home owners and families. The industry claims that Labor’s push to restrict negative gearing and reduce capital gains tax will increase rents and decrease property values, affecting some 18 million people.

Finance gurus John Symonds and Mark Bouris also weighed in on the argument. ‘Big John’ sending alarm bells and warning of a potential  Armageddon if negative gearing is scrapped. John Symond said, making changes to negative gearing of property would most likely result in unintended, negative consequences for the housing sector which is “a key economic driver of the economy”.

In an interview with the Financial Review, Mr Bouris said “It will kill the investment market. I think it’s a terrible idea”.

“The fabric of Australian investment portfolios has been investment property. Any change would rip the guts out of the economy and growth.”

“Politicians talk about the amount of money we lose from people claiming negative gearing tax breaks, but I would love to see the impact on the other side, when the investor market dies off.

Against all this are the latest finance figures released for March showing investors back in force, borrowing to buy what they see as a ‘safe investment’ in bricks and mortar. In Victoria the percentage of mortgage lending (excluding refinances) to investors soared to 46%, see state by state graphic below.

Not surprising though when you talk to cautious Baby Boomers, who having personally experienced or heard of the tragic loss of their nest egg in the 2008 GFC and are yet to recover.

 

Source: CoreLogic

Also released by Core Logic last week were the age groups who own investment property and claim the highest negative gearing. To my surprise it was 18-24 year olds who were the largest group, not the 40 plus group as one would expect.

Talk of lower interests rates will no doubt fuel the property market even further. One of the big four banks the CBA tipped last week the Reserve Bank could slash the cash rate to 1.25% by the end of this year, 0.5% less that where cash rates are today!

 

What our Clients Are Saying?

 

We would like to thank you for all your hard work, your advice and your attention helping us to secure an excellent investment property.  Being first time investors, you were happy to spend time with us explaining how it all works and always happy to answer our many questions. You sorted through lots of properties according to our brief to finally secure a fantastic place in a great location and at an excellent price. You made negotiating with the vendor’s agent a breeze and your knowledge of the industry and players was a huge advantage.  All in all, we are so glad we had you as our advocate for this purchase and we hope that we can work with you again in the future. Peter and Jenny.

Thinking of buying or selling a home?

Visit our Street Advocate website or send an enquiry below or just call

Peter Sarmas on 0418 740 606.

 

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If you are thinking of buying, selling or investing and would like a FREE 5 minute chat with Street News Director Peter Sarmas, please contact him on 0418 740 606 
or via email at [email protected]

About the Author

Peter Sarmas is a Certified Property Investment Advisor (PIAA) and Vendor/Buyer Advocate. Before becoming the founder of Street News, Peter completed a Degree in Applied Science (Chemistry) and a Graduate Diploma in Property Valuations (Hons). Peter believes property investing is a major and potentially risky undertaking. In his view, everyone should have an independent person acting on their behalf when seeking property investment advice.

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