Sydney rents versus inflation
Scrolling back through more than four decades of data, we can see that there have been three distinct periods where rents in Sydney have outpaced consumer price inflation, each of which, logically enough, has followed a pullback in investor activity.
Most notably, in the period following the quarantining of “negative gearing” legislation in 1985 rental increases rose at a blistering record annualised pace of nearly 17 per cent per annum (refer to point A on the chart below), before falling sharply after the reinstatement of the legislation as investors and developers returned to the market.
Cabinet papers from the time show that unlike some other capital cities Sydney’s rental market was already relatively tight in 1985, and while Melbourne was experiencing what was then a near-record net outflow from interstate migration, population growth in Sydney was robust (albeit not even remotely close to the levels being seen today).
The detrimental impact of the quarantining of negative gearing legislation on housing starts was predictable, marked, and immediately reversed upon the reinstatement of allowable deductions, while waiting lists for public housing also spiked between 1985 and 1987.
Less dramatically, there was a second stretch running between 1996 and 2000 when rents were rising faster than consumer prices (point B), until a multi-year, investor-led property boom around the time of the Sydney Olympics.
Most recently, from 2007 forth there was a third period where rents rose sharply, with a notable spike in 2008 when tales of landlords in the eastern suburbs jacking up rents in double digit magnitudes were commonplace (point C).
The investor boom
Since 2012 a salvo of interest rate cuts has seen Sydney experience the largest run-up in investor activity in the history of the harbour city, with investor loans at the peak having accounted for more than half of the mortgage market, excluding refinancing transactions.
Since July 2012 the median Sydney house price has soared by 62 per cent, with unit prices also showing extremely strong growth of 41 per cent.
Despite an expected lag, the supply response has been both sustained and significant, and although APRA has now enacted a crackdown on investor loans the pipeline of both construction and building approvals remains at elevated levels.
In turn this will be good news for renters is Sydney as the new supply comes to market, whilst the erosion of yields means that it is often far cheaper to rent than to own a place of residence from a monthly cashflow perspective.
Localised apartment gluts
The headline data suggests that with population growth in the state the strongest in the nation tracking at more than 104,000 per annum, there is still likely to be a relative shortage of houses in desirable inner-suburban areas.
After nearly a decade of under-building, this construction cycle has evidently been heavily tilted toward attached dwellings – townhouses, units and apartments – to a degree not previously seen, and to the extent that some parts of Sydney will see an oversupply of new units.
There are a number of obvious apartment construction hotspots, including around Parramatta and some of the formerly industrial suburbs in the inner south of the city.
Apartment prices will correspondingly fare better in supply-constrained locations, such as in some of the leafy eastern or lower north shore suburbs.
A room with a view?
In particular, this cycle has seen a huge surge in the approval of high-density dwellings, especially those of four or more storeys.
A quarter of a century ago only a fraction of total approvals was accounted for by this type of dwelling stock, but over the past three years there has been an enormous leap in high-rise approvals as former industrial sites are rezoned for residential development.
This dynamic has been echoed across each of the most populous capital cities, and the outcome will be that apartment rental growth should fall at least to the level of inflation, and more likely than not stagnate or decline in some parts.
There are a number of factors which could disrupt this trend, most pertinently if the crackdown on investor lending causes approvals to be aborted before they ever become dwelling commencements.
The Department of Immigration and Border Protection (DIBP) also forecasts very significant increases in student visa grants over the remainder of the decade, which could result in a shake-up in some inner city markets.
Overall, though, the next few years are likely to see the balance between landlord and renter swing back in favour of the renter while the looming overhang of new dwelling stock is absorbed.
Whether by design or default, there will always be a strong demand for rental property in Sydney, particularly in such a city within which close to two-thirds of the population growth is accounted for by net overseas migration.
Data released for the month of November showed that annual new motor vehicle sales in New South Wales have roared to an astonishing record high of more than 378,000 as owner-occupier households enjoy the wealth effect of rising dwelling prices.
Despite a high level of infrastructure investment in the pipeline, which includes roads and motorways, these figures merely underscore that Sydney’s traffic congestion will worsen over the years ahead, and in turn landlords with A-grade properties close to key train and light rail links will likely have few problems letting them.
Generally, however, after some years of having things their own way many landlords will find the market moving into equilibrium in 2016, and for the first time in years renters will find that they have a greater choice.
Landlords may need to make greater efforts to present their property favourably, and in some cases negotiation on price may be the order of the day.