Rental Market State of Play

Rental returns across the combined capital cities have recorded their weakest rate of growth on record. A recent report from CoreLogic RP Data shows rents have grown by just 0.9% over the past year and that’s the slowest rate of growth since they started compiling data in 1995.

There are a couple of reasons why this is happening. Firstly, there’s a construction boom going on, particularly in Sydney, Melbourne and Brisbane. As we all know, when you increase supply to a point where it meets or exceeds demand, you get a softening in prices.

Secondly, we’ve got a huge number of investors – both locals and foreigners, buying property and this is adding to the supply of rental homes.

So let’s look at the flipside.

It’s great news for renters and frankly, they’re overdue for some good news. Landlords are enjoying record low interest rates and yields of 4-6% or even higher so many of them are in the enviable position of having neutral or even positively geared properties right now.

Also, rental growth might be slowing down but it’s not going backwards, so many landlords won’t be in a position where they have to reduce rents, they’ll just have to keep them at the same level for a while.

More properties available for rent means more options for a growing community of renters – especially Gen Y Australians, many of whom have resigned themselves to a life of renting in expensive cities like Sydney.

When supply increases, landlords need to be extra careful to keep their tenants happy. The most important is responding to their needs – quickly. Don’t delay small repairs – accept the cost (which is almost always tax deductible or at least depreciable) and get it fixed. If your tenant believes you will look after them, the allure of a slightly better value option down the road won’t be enough to make them move out.

If your property is going onto the market at a time of increasing supply, do something to make it stand out. You need to ‘wow’ tenants when supply is high. If your property looks well-kept, that will take it to the top of the list. Quality is important to tenants – remember, this is going to be their home.

For a few hundred dollars, get professional cleaners in to give the property a really good make-over. The tenant departing your property will never do as good a job as professionals. Don’t forget about the windows either – sparkling glass makes a huge impact. If your walls are a bit grimy, get the place re-painted and replace the carpet if it’s worn down. These simple, low-cost measures will have a big impact in attracting tenants.

The CoreLogic RP Data report included the average annual change in rents over the past 10 years and it’s all good news for landlords. These figures just go to show how reliable and safe property is as a long-term vehicle for wealth creation.

Average annual change in rents over the past 10 years

Sydney 4.8% pa
Melbourne 3.6% pa
Brisbane 4.1% pa
Perth 5.2% pa
Adelaide 3.2% pa
Canberra 2.9% pa
Darwin 4.6% pa
Hobart 3.1% pa

In terms of the importance of rental returns to landlords, of course we all want to receive the maximum yields possible. We’re in the game to make money, after all. But in the grand scheme of things, I have always seen rental yields as less important than capital gains.

If you’re looking at buying an investment property, consider the potential for capital gain first. Don’t go buying a high yielding property that has little potential for growth in value. It won’t serve you well in the long run.

The ideal scenario is to have some blue chip investments in your portfolio that are delivering reliable long term capital growth; and a couple of cheaper properties that deliver a great yield to help you afford the repayments on the blue chips (which are often negatively geared as high quality properties cost more to buy!).