September 2008
It’s the rental Boom Australia had to have. The lack of new construction and supply, unprecedented new migrant arrivals, the population growth, high employment and a strong economy, combined with the lack of rental property and full occupancy rates, all point to rising rentals.
And perversly, the interest rate rate rises over the past few years are helping fuel these rent rises.
Realestate.com.au manager Shaun di Gregorio recently likened it to “a perfect storm “ brewing for the rental markets, as Australia’s Golden Age of cheap rental accommodation for tenants draws rapidly to a close.
Some investors think the recently increasing interest rates in Australia have also meant that repayments on loans would be “too high” to support an investment.
THE REAL COST OF HOLDING AN AUSTRALIAN PROPPRTY INVESTMENT IN A HIGHER INTEREST RATE CLIMATE
Consider this. In June 2005, a $500,000 apartment in Melbourne that had a 70% loan ($350,000) would have cost an investor $457 a week in loan interest repayments.
Over the past three years, mortgage Interest rates have now risen to 8.85% (Banks discounted rate as at June 2008: source Reserve Bank of Australia) so the same loan now costs this investor $596 a week, compared to just $457 a week. Most would consider this a big increase, and , perhaps, unaffordable?
Now let’s look at what has happened to rents.
In June 2005, the rental for this property was $400 a week; meaning to hold the property, (with loan interest at $457) was around $57 a week. (Excluding any other costs at this time for the sake of the example).
Melbourne apartment rents over the same time frame have risen by some 36%, meaning the rent has now gone to $544 a week.(source: RP Data)
Repayments in June 2008 are $596 a week, and rents at now $544 a week. The difference in the holding cost has in fact now dropped, even though interest rates have risen considerably.
In other words, for many investors, even with higher interest rates, their actual holding cost of the property is now lower than three years earlier.
And those who took out loans more than three years ago are more likely to still be in front, despite numerous interest rate increases.
An average wage earner, who took out an average home loan back in July 2002, would have seen their weekly salary rise by $234 since then, in conjunction with the tax cuts, while the interest rate on their home loan had risen from 6.55 per cent back in 2002 lifting home loan repayments by just $69 per week.
WHAT HAPPENS NEXT?
So, if interest rates come down by before Christmas 2008 as has been widely expected, and rents continue to increase the position rapidly changes.
Say a one percentage point drop in interest rates, and rents rise another 10 %,( inevitable, as will be explained shortly) then the same loan turns suddenly into “cash flow positive” by some $70 a week! A dramatic turn around. And very close to happening. (Again, we have ignored other costs for the sake of the example, to show mainly the effect the current interest rate and rents are having on an investor, as every investor has a different loan figure and property holding costs etc)
INVESTORS RETURN
One complaint some investors have had over the past few years is that rental returns in Australia were “too low” to make an investment attractive.
But when rents become close to interest payments investors flood back into the market.
Once people perceive the general interest rate trend is down, rather than up, make no mistake, investors and home buyers will rush into the market, and given the shortage of actual property available, especially in prime areas, who would bet against rapid price inflation?
WILL RENTS CONTINUE TO RISE?
Investors are keen to know what will happen to rents, or are they too late to lock into our greatest ever rental boom? Occupancy rates in all Australian capitals for residential rental property are now over 98%. These high occupancy rates coupled with unprecedented demand and a shortage of housing are likely to continue to fuel growth in weekly rents, particularly in capital cities.
Residex senior research analyst John Lindermann (as reported by Australian Property investor) agrees rents are going only one way: up.
“I think it will continue for the next couple of years at least “ he says.
The real estate portal for renters, Domain.com.au, saw a massive 30% increase over the year to June 2008 on people searching for rental property.
Australian Property Monitors predicts rents will rise by an outstanding 50% over the next four years, while Bis Shrapnel expects 10% a year increases are possible, with Sydney set to jump 15% in the next 12 months.
Di Gregorio expects the inner suburbs of Sydney, Melbourne and Brisbane to lead the way in terms of rental increases.
Commonwealth Securities chief equities economist Craig James said on the 3rd July 2008.
"With population growing at the fastest rate in 18 years, we simply should be building more homes, not less.”
"The latest slump in new dwelling approvals is clearly bad news for those renting," he said.
Further he continued "The supply of apartments isn't rising but the number of people wanting to rent certainly is."
CAN TENANTS AFFORD TO KEEP PAYING THESE HIGH RENTAL INCREASES?
In Australia, the most commonly accepted figure used to determine whether rents are unaffordable, is if more than 30 per cent of a households gross income is allocated to rental.
On this basis, according to extensive research complete by Matusik Property Insights, “rents have a long way to climb before they become unaffordable, with 18% rises in Sydney, 38% in Melbourne, 33% in West Australia, and 13 percent in Queensland before renters will reach the 30 per cent income benchmark”
And that’s before any salary increases over the next few years.
WHEN TO MAKE YOUR MOVE?
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(PRESS ARTICLE: JULY 3, 2008)
“Home prices to explode, ANZ Bank predicts”
- "Mother of all" housing booms coming, says ANZ
- Chronic housing shortage will push up prices
The ANZ Bank says the growing housing shortage is setting Australia up for the "mother of all" housing booms.
New home slumping building approvals have sparked fears of a price and rent explosion that will price even more prospective buyers out of the market.
The ANZ's senior economist, Paul Braddick, said yesterday Australia faced a critical and potentially chronic shortage of housing.
"A growing housing shortage is setting the scene for the mother of all housing booms," Mr Braddick said.
"Demand has accelerated and rising immigration, both permanent and temporary, shows no sign of abating.
"Underlying housing demand is already outstripping new supply, and the gap is set to widen sharply, driving pent-up housing demand to record levels," he said.
Commsec chief equities economist Craig James said a "triple whammy'' of factors was paving the way for a boom once interest rates were cut again.
"Not only is the rental market super-tight, but population growth continues to strengthen and speculation has shifted to rate cuts,'' Mr James said.
"If rates are cut in coming months, investors could easily swing from cash-based investments and the share market to the property market.''
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Given this scenario, it may be wise to try to time your move BEFORE interest rates are cut. Make no mistake, once investors and home buyers feel rates are on the way down, there will be possibly thousands of people competing for a massive shortage of property. Classic supply demand imbalance.
For overseas investors, an off the plan opportunity with a two year completion would seem ideal, providing they lock in early. They should then benefit in two years from falling interest rates, high rental increases, increased demand, and best of all, would have purchased at todays price.
©2008 The Citylife Property Group
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