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Monday, 26 February 2018

A coming rental crisis?

Rental price growth

There's been a lot of talk of oversupply in Australia's housing market.

Although we don't really have 'too many' dwellings, what we have had is an unprecedented surge in investors and investor-owned properties from home and overseas. 

In other words, lots of rentals! 

This helped to push rental price growth down to levels not seen for a very long time, although Sydney and Melbourne have seen rents rise faster than some of the other cities. 

This dynamic is now changing, although it may not be evident in the rental market for some time. 

Domestically, investor loans have slowed. 

Just as significantly, investor activity from overseas has been absolutely annihilated.

And as I've said here before, I think the end result will be a rental crisis (I'm often wrong, of course, but never in doubt!), although it will take time for this to become evident. 

Slow burn

Now I know what you're thinking, Sydney has a record number of apartments under construction (true, at the last count, which was from June to September last year), and that rental price growth hasn't been especially strong for a long period now. 

That's also been true recently, though in another context rents in Sydney have still risen at double the rate of inflation over the past decade, despite the record surge in investors. 

Take a look for a moment at what happened during the financial crisis when investors stopped buying. Whoosh, rents rocketed. 

In any event, that data is all backward looking - what I'm talking about is the next five years. 

Why a rental crisis you ask? 

Firstly, I believe there will be a record demand for leasing rental properties. 

Yes, that's partly due to the record levels of immigration into Sydney, which I expect will remain very high over the coming years with the unemployment rate now heading to under 4½ per cent

But even just putting the charts and official statistics to one side, have a think about how many people you know that are renters these days? 

A lot of people, huh? More than ever before? 

The reality is with people changing jobs and moving around more frequently than ever has been the case before, it simply isn't practical to keep buying a home each time you move, especially with the stamp duty levies now at extraordinary levels

The demand side is one thing.

The other is the future supply of rentals. 

Recently, a range of measures have made it progressively harder for investors to bring rentals to the market in a way which works for them. 

Domestically investors are finding it far tougher to get interest-only loans unless they pay a higher mortgage rate, travel expenses are now disallowed, plant & equipment depreciation has largely been disallowed on established dwellings, and so on. 

The Labor party is also proposing further measures to restrict tax deductibility, and I don't pay attention to what anyone says on this, if apartment prices begin to fall materially ain't no adequate supply gonna get built come hell or high water. 

Ex-New Zealand, overseas investors now can't get access to onshore finance from Australia full stop, and even if they can they get it overseas they have to pay stamp duty and land tax surcharges to buy here, so unsurprisingly they are heading elsewhere. 

There have also been other tax measures aimed at expats, among a raft of other niggles. 

Anyway, contrarian calls such as this are always treated with disdain until proven right or otherwise - but let's just bookmark this post for when the construction cycle tapers off in a year or two.