Runaway Rents

  • Runaway Rents image

The latest rental vacancy rate figures make grim reading for rental tenants, but provide property investors with plenty of comfort in the face of rising interest rates.

SQM Research’s September data showed the national vacancy rate had fallen to 0.9%. That means less than 1% of Australia’s rental properties are currently untenanted. It’s the lowest level in 16 years.

In Sydney, it’s down to a decade low of 1.3%, while Melbourne’s 1.4% is its lowest in four years. Both these markets were on the wrong side of 3% not so long ago. Meanwhile, Brisbane is at a record low of 0.7% and the remaining capital cities have also fallen below 1%.

Why has it happened?

The availability of rental stock has taken a hit in recent years for a number of reasons.

First, the pandemic lockdowns and associated travel restrictions meant that people couldn’t head overseas on holiday anymore. The result was that many more people traveled domestically. The surge in demand for holiday accommodation saw many landlords pull their properties out of the traditional rental market and list them on Airbnb or other short term platforms, where they could make a much larger return in a shorter period.

Next, the rise of building and construction costs, plus delays in supplies and shortage of labour has seen new building projects slow down. With fewer new properties available for purchase, owner-occupiers bought a lot of properties that had originally been rentals.

Then there were regular crackdowns on the investor market by APRA in a bid to discourage investors from keeping first home buyers out of the affordable end of the market.

And finally, this year’s major challenge has been rising interest rates. Suddenly, many more Australians who would have been looking to buy are finding themselves unable to get loan approvals, so are needing to rent for the time being. That has added even more demand for any rentals that are available.

What has this done for rents?

The last year has seen an incredible 20% increase in asking rents across Australia. Sydney and Brisbane have both seen rental growth of more than 22% in this time, while all capital cities have recorded at least double digit growth.

Those sort of numbers manifest into serious gains for landlords. In the greater Sydney area for example, PropTrack data shows there are 119 suburbs where the median asking rent is higher than $1000. So landlords in each of those are earning at least $200 extra a week in rental income. That’s $10,000 per property, per year extra that investors can earn.

Meanwhile the average rent for all Sydney suburbs is $683 a week. So landlords on average should be commanding $150 more a week from tenants than they were this time last year.

What happens next?

SQM Research managing director Louis Christopher told the Australian Financial Review that he expected the market to get even tighter from here.

“Our current rental listings so far in September suggest we’re going to record another fall in rental vacancy rates, and I see nothing in this data right now to suggest we’re about to bottom out,” Mr Christopher said.

Add to this the increase in migrants soon to be flooding into the country, many of whom will need to rent properties before they can buy, and you are faced with hundreds of thousands more people to add to the competition for the scarce supply available.

So what should investors do?

You will have noticed your loan payments going up as the RBA continues its current aggressive cash rate hike strategy. But with asking rents also surging, you want to make sure you are earning the maximum income possible, while paying as little money to the bank as you can.

Check in with your property manager to make sure you are being paid market rent. For all you know, you might be costing yourself thousands of dollars a year. If similar properties are earning $100 more a week than yours, talk to your manager about increasing the asking rent at the end of the next lease period, or giving the current tenants fair notice of an increase if there is no ongoing lease in place.

Just imagine you had 10 properties, each of which have increased in rental value by $100 a week. That’s $50,000 more per year that you should be earning. That’s more than half an average annual wage and a sizable step towards living life on your own terms.


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