What a great time to an an Australian landlord. Rents are skyrocketing
especially in Melbourne and Sydney.
It’s the rental Boom Australia had to have. The lack of new construction and new supply over the past 5 years, unprecedented new migrant arrivals for the past 4 years, natural population growth, combined with the huge lack of property available to rent, the lack of new construction and very high rental occupancy rates, all point to a crisis situation for tenants and a boom for landlords, with rising rentals for years to come when the largest population boom in decades years hits the greatest housing shortage seen in years.
Many of our clients are seeing their previously "negatively geared" properties turning into cash flow positive overnight as interest rates remain resonable (see chart here) and rents rise dramatically. As rents go from figures like $450 a week
to $570 on new lease renewals. It's boom times for Landlords! (see chart below)
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. (see chart)
Between 2005 and 2008, mortgage Interest rates rose to around 8.85% (Banks discounted rate as at June 2008: source Reserve Bank of Australia) so the same loan now would have now cost this investor $596 a week, compared to just $457 previously. Most would consider this a big increase, and, perhaps, unaffordable?
In June 2005, the rental for this property was around $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 started to rise towards the end of 2007, and gathered momentum right through 2008. By June 2008 the rental for the same apartment had risen to around $544 a week.
Repayments in June 2008 were $596 a week, and rents were now $544 a week.
WHAT HAPPENS NEXT?
As at January 2010, interest rates had fallen and were still low, and rates can still be obtained at around 5.5% to 6%, and rents have continued to rise. So as at January 2010, the rent was now $587 and the mortage interest was now $397 per week, meaning the exact same property was cash flow positive by $190 a week.
WEEKLY RENTAL VS BANK INTEREST REPAYMENTS, MELBOURNE APARTMENT
| | June 2005 | June2008 | January 2009 | Febuary 2010* |
Loan Interest | $457 | $596 | $493 | $397 |
Rental | $400 | $544 | $565 | $587 |
| (Shortfall)/Surplus | ($ 57) | ($ 52) | +$ 72 | +$190 |
Notes: Based on a $500,000 Melbourne apartment, with a 70% ($350,000) mortgage. For illustration purposes, outgoings not included. Febuary 2010* estimate based Reserve Bank of Australia's Banks Variable Discounted rate.
As investors pour back to the property market expect prices to rise steadily over the mid to long term.
(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)
"Apartment hunters face 'mission impossible' in Melbourne" The Melbourne Age
THE New South Wales government is calling for calm after reports of a rental crisis in Sydney, leading to incidents of "rental rage" against real estate agents.
Housing Minister David Borger said reports only 739 houses were available for rent in Sydney were not cause for landlords to jack up rental prices unreasonably.People have become so desperate to secure a property that (agents) have been offered bribes and even had prospective tenants break down because they 'cannot compete with the number of people looking for properties'".
WHEN TO MAKE YOUR MOVE?
History teaches us most investors wait to long to move, and miss the property they want, or pay more than others for it. The financial crisis has meant another perverse benefit for property investors.
With the tenants paying all the bank interest (as shown above) a property has little cost to hold.
And here is the kicker.
Property developers in the current climate have found it much harder to get funding for projects, and so many projects are either "delayed" or cancelled.
This growing housing shortage is setting Australia up for a rent and price explosion.
The ANZ Bank's 's senior economist, Paul Braddick, said Australia faced a critical and potentially chronic shortage of housing.
There is still all the "pent up demand" from before the financial crisis, and huge migration for the past 4 years means this will not be relieved anytime soon.
Underlying housing demand wass already outstripping new supply, and the hundreds of project cancellations will make the situation worse, driving pent-up housing demand to record levels.
