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

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Wednesday, 17 May 2017

"Oversupply? Forget it" says SQM

"No oversupply"

Rental vacancy rates inched higher in April with most capital cities recording an increase over the month, but remain relatively low even at this stage in the construction cycle. 

The national vacancy rate edged up from 2.3 per cent to 2.4 per cent in the month, but SQM Research cut straight to the point in its newsletter:

"Remember, this time last year there was a real fear of a unit oversupply. Forget that now for Melbourne and Sydney. There is no oversupply. 

And, depending upon how first home buyers respond to the Budget, there could be significant under-supply later in 2018-2019 which may cause rents to skyrocket.

After all, rents in Melbourne are already well above expectations this year."

Plotted below are the vacancy rate numbers by capital city on a 6mMA basis.

As you can see, Hobart and now Canberra have extremely tight rental markets, leading to strong rental price growth in both of these capital city markets. 

Dwelling owners in Canberra are about to be hit with big rates and land tax hikes from July this year, with more to come in July next year. 

Despite there having been a high volume of apartments under construction in the nation's capital, median asking rents have already surged by 9.3 per cent for houses and 6 per cent for units over the past year, as being a landlord in the nation's capital becomes less attractive, at least from a cashflow perspective. 

On the other hand asking rents have continued their multi-year decline in Darwin and Perth.

Big cities absorbing stock

Annual growth in asking rents has increased solidly in Sydney, and have even picked up the pace in Melbourne, both units (4.7 per cent) and for houses (6.4 per cent). Reported SQM:

"We are nowhere near to seeing any signs of an oversupply of units in either inner-city unit market."

A prime reason for these two cities having "still tight" markets has in part been thunderous population growth, particularly in Melbourne where the trend for vacancy rates sits back at its lowest level in at about half a decade. 

The wrap

This is a bullish call by SQM, with there still being around 217,000 dwellings under construction at the beginning of the calendar year. 

SQM’s calculations of vacancies are based upon online rental listings that have been advertised for three weeks or more compared to the total number of established rental properties, explaining the relatively low absolute readings. 

This produces consistent and meaningful results, but there could arguably be a risk of understatement at the peak of the construction cycle if newly constructed blocks of apartments only see a sample of units advertised online. 

Over the next two years Melbourne and Sydney will likely see the completion of another 100,000 units each, while Brisbane will struggle to absorb the estimated 45,000 apartments expected to complete over the same time horizon.

Nevertheless, the statistics at this stage for Sydney and Melbourne show relatively well balanced rental markets, with some units owned by foreign buyers also likely to be held empty.