Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 22 July 2015

Slowest rental growth since 1995

Rental growth remains slow

Delving a little further into the inflation data, we can see that on a national level rents increased by just 0.4 per cent for the quarter and 1.9 per cent over the year to June 2015, which is the slowest rate of rental growth since September 1995.

There are a number of different drivers of this trend as often documented here previously.

These include new dwelling supply coming online, the mining capital expenditure boom going into reverse gear, and in some areas simply more investors buying property than tenants requiring housing.

This is particularly so given the number of first-time investors NAB's Q2 survey found that 27.5 per cent of new properties were bought by first-time buyers rising from 24.8 per cent in Q1 (so much for an entire generation being "priced out") but close to half of them in the capacity of investor.

It's a trend which will reverse in time, but for now some markets are top-heavy with investors, so while prices may be rising, rents are soft.

Mind you, headline inflation is only tracking at 1.5 per cent - and since commentators so love to adjust for inflation, it's worth noting that rents have been rising in real terms, particularly in Sydney.

Mining downturn

The resources-influenced cities are the major drivers of the decline.

While rental inflation was positive in the year to June in Sydney (+2.6 per cent), Melbourne (+2.5 per cent), Brisbane (+1.4 per cent) and Adelaide (+1.6 per cent), rents in Perth were down by 0.4 per cent. 

In the smaller capitals rental growth remains soft in Hobart (+1.1 per cent) and have declined fairly sharply in Canberra (-2.7 per cent).

While rents over the past year in Darwin are still up (+0.9 per cent) it is only a matter of time before this figure too turns sharply negative, after some hella wild boom times over the past decade!

Rental index numbers

Looking at the long run index figures shows how rents by capital city have tended to track each other fairly closely over time. 

Perth rents are now due to correct in real terms after a very strong decade through the mining boom. 

Elsewhere, in the major capital cities rents are still rising, although more moderately than has previously been the case.

In such a climate, investors in rental property would be wise to select assets with great care - with a focus on land-locked capital city locations where demand is strong and growing, but supply is restricted - and particularly to take a longer term outlook on their investments.

Those buying new or off-the-plan properties in today's low inflation environment should not be expectant of capital gains in nominal terms, perhaps for some years.

The 5 and 10 year growth in rents by capital city chart shows that the cumulative effect of seemingly insignificant annual rental increases have added up to be substantial over time.