Twelve months ago, it would have been typical for prospective tenants to spend their weekends bidding at auctions to secure a rental property. While unpleasant for
tenants, this intense competition led to significant growth in rental returns over 2008 and provided a healthy backbone for many property investments.
However, the effect of considerable economic changes have demonstrated that the 10-15% growth in national rental returns experienced across 2008 will be unsustainable going forward. "We're more likely to experience a moderate level of growth between 7-10% over the next 12 months," says RP Data's research analyst Cameron Kusher.
Factors influencing the change. The global financial crisis has produced two significant factors that triggered the slowdown in rental growth across many capital cities: loss of jobs and unusually generous government incentives for first homebuyers. "A rise in unemployment can place a huge strain on the economy and property markets," says David Airey, the president of the Real Estate Institute of Australia (REIA). "If you haven't got a job, it is very difficult to pay rent or a mortgage, so people have to look for other options."
The pressure on tenants who have been made redundant or fear for their job security has encouraged many to either move in with their parents, move into larger and more cost effective accommodation, or relocate to cheaper areas altogether. "On top of this, many young people are not taking that step and moving out of home, because they're just not in the position to do so at the moment," says Kusher. "And so when there is not that replacement demand for rental property, with first homebuyers moving out of the rental market to buy, rental return growth can be at risk of tapering off into the short term."
State of the rental market in the first half of 2009
Rental growth is predicted to be minimal over the next 12 months, but performance during the first half of 2009 has been impressive considering the global challenges thrown at the property market.
Data released by Residex for the month of June shows that Australia's rental returns have held up strongly amid the economic crisis. Rents for both house and unit markets have increased or held their value in every capital city over the 12 months to June 2009, except for the house market in Melbourne which has dropped $10 per week.
Investors with houses and units in Darwin were the biggest winners over the year ending June 2009. House rental in the city increased $70 per week, while units managed to pick up an extra $40 a week. "Property prices and rental returns just keep rising in Darwin and you'd think that at some stage soon things will subside, but there is still no evidence of this happening yet," says Kusher. "Their growth is heavily linked to strong demand for mining and defence force personnel. The demand for property from the defence industry is not likely to slow down or drop off any time soon, after the government threw more money at defence within the budget."
Despite anecdotal evidence of softer demand for rental properties, Sydney rents rose on average by 32% over the past three years according to CommSec. The rental vacancy rate in NSW fell to 1.0% in May, close to the lowest levels in 21 years, Commsec says.
"The latest data shows that NSW rental markets remain tight. In Sydney, the vacancy rate fell from 1.5% to 1.0% in May - marginally above the record low set in March 1987. The latest national figures showed that all capital cities had vacancy rates below 2.5% in the December quarter. And in the March quarter rents nationally were up 8.1% on a year ago - near the fastest rate in 20 years," it says.Supply and demand are regarded in balance when the vacancy rate is around 2.5-3.0%.Factors underpinning goodrental returns
Many property investors are concerned that the large numbers of first homebuyers in the market will have an effect on vacancy rates throughout the back half of 2009, because most first-time buyers and first timers-to-be would have originated as renters.
However, experts say there is more than just first homebuyers holding up Australia's rental market and influencing rental returns. HIA chief executive, Chris Lamont, says that Australia's housing supply is not keeping up with the demands of a strongly growing population - placing further pressure on rents and increasing returns.
According to the Australian Bureau of Statistics, Australia's population increased by 1.9% in 2008 to 21,644,000 people - up 406,100 people from 2007. Net overseas migration contributed to more than half of this growth at 62%.
According to the National Housing Supply Council, it was estimated that by the year 2028 the net number of new dwellings required for Australia as a whole would be 3,060,000. This equates to 153,000 dwellings per year.
"The acute shortage of new housing stock remains the major driver in pushing rents higher and keeping rental vacancies at low levels," says Lamont. "Investment in private rental accommodation has not responded to low interest rates. It is languishing in a slow economy with tight credit."
Airey says rental properties priced around $500 a week or less are maintaining vacancies below 2% nationwide, and there have been no signs of significant reductions in rents over all capital cities.
However, he says the real area of concern right now is for those property investors with rental properties in the higher end price range, above $600-$700 a week.
"A normal vacancy rate would be between 2-2.5%. Although, the higher you go over $500 a week, the higher the vacancy factor," says Airey. "There is lack of demand for higher-priced rentals now because those who have lost their jobs have had to adjust their lifestyles considerably, and corporate rentals are just not being filled (which is noticeable in the resource states like Western Australia). In some areas, vacancy rates are as high as 3% or 4%."
The best chance for investors with higher priced rental properties would be to keep their rental prices realistic, so that their properties are earning an income while they wait for demand to pick up again.
Where to find solid rental growth
Kusher says capital cities such as Adelaide, Melbourne and Brisbane can expect decent growth in rental returns heading into 2010, off the back of good property price growth in 2007/08. "When property prices are growing, like they had been in Adelaide, Brisbane and Melbourne throughout the majority of 2007/08, the rental rates just aren't able to keep pace," says Kusher. "Then once price growth subsides somewhat, rental growth
rates really pick up - which is what is happening in inner city Adelaide at the moment."
According to RP Data, Australia's top performing suburbs for strong rental return over the year to March were predominantly placed within 10km from the CBD of capital cities.
Clarence Gardens and Underdale, for instance, both located within 10km of Adelaide, experienced a 25% increase in house rental growth over the year to March 2009.
Most properties located in capital cities experience decent rental returns, but pinpointing individual suburbs that will provide the most growth in rental returns can be trickier.
Airey says investors need to concentrate on buying properties close to established infrastructure, transport, shopping facilities and educational facilities such as schools, colleges and universities.
"These are the biggest attraction for renters, especially transport," says Airey. "The closer investors buy to transport - even if the property is further away from the capital city -
the less pressure there will be on the rental return." In regional areas, Airey says the performance of rental return relies heavily on the availability of jobs. "Rental returns in Kalgoorlie have been very much affected from the cutbacks of resources and resource renting," he says. "There is an extremely high vacancy factor there now as a result."
Six suburbs across NSW recorded the strongest growth in house rental returns during the year, according to RP Data. Rental returns for houses in Campsie, Waterloo, Oatlands, Forster, Waverton, East Hills and Kirribilli all grew 25% during the last 12 months. All of these suburbs, except for Forster and Oatlands are situated in Sydney. Waterloo, Waverton and Kirribilli are all located in the inner city of Sydney, with Waverton and Kirribilli actually sitting on the harbour front - making them highly desirable places to rent for those who are priced out of the local buyers' markets."Most of the other suburbs located outside of the inner city are situated close to major working nodes," says Cameron Kusher, research analyst from RP Data. Kusher says all of the suburbs which recorded the strongest unit rental growth were located in Sydney. "The results are mixed, with the inner-city suburbs Point Piper, Bondi and Waterloo detailing strong demand for inner-city living," he says. "Fewer people can afford to buy in these locations, but people still want to be in the area so they will rent, which increases returns."Kusher says the remainder of the suburbs, such as Warwick Farm and Harris Park, are located in outer areas of the city where rent is more affordable - but their proximity to working nodes makes them popular.
"The more affordable locations will do the best in terms of stronger rental return growth, because the high-end suburbs are getting too expensive," Kusher says.
Ian Vines, local real estate agent from Gardenview Apartments - Neutral Bay thinks Waverton is a hidden gem for properties. Rental returns in the suburb grew by 25% in the year to March 2009. "Waverton is located close to the harbour in Sydney, close to two train stations at Waverton and Wollstonecraft and is a very leafy area that is just five minutes drive from Sydney CBD. The suburb has been a sleepy and undersold location when compared to the nearby suburb of McMahon's Point, but now buyers and renters are discovering its benefits. Its proximity to everything will keep growth in rental returns continuing into the future."
James Brown, listing agent from Keystone Property Management - Sydney says Waterloo will continue to grow in popularity because of its close proximity to the city and the great public transport on offer from nearby Redfern and Green Square train stations.
"It is only a 1km drive to the Eastern Distributor from Waterloo, which links to the airport and the lower north shore, and it is also only a five minute drive into the city. The Redfern and Waterloo region has long been an industrial, however they have really been cleaned up over the last 12 months and the new buildings coming through have helped to push the value of rental returns. The bordering suburb of Zetland has also been improved,
so this ongoing urban renewal has really boosted the desirability of the entire area."
Julie Manning from Margaret Price Real Estate - Forster says rental properties have been very popular of late.
"Houses in Forster rent very quickly because of the growing popularity of the area. There are mixed employment opportunities in the area with the current economic climate. People are coming into town to take retail positions, however building jobs have slowed right down. Local infrastructure has experienced a boost in the last few years, bringing more and more people into town for holidays and permanent rentals. It is so tranquil and peaceful here that those who holiday here tend to come here to live. This has been happening a lot lately and many actually prefer to rent first before buying, which has had a positive effect on rental returns. Holiday rental returns have also been increasing in the last 10 months, because it is cheaper to travel here than go overseas."
Top rental performers in Canberra were scattered right across the city according to Kusher.
"For houses, the suburb with the strongest growth was Yarralumla in the inner south-west of the city, which grew by 16.7%," he says. "Across the unit market, Narrabundah in the inner south-east of the city saw the largest rise in rentals during the last 12 months with 11.0% growth," Kusher says.
"The fastest-growing suburb for house rental returns is around the 17% mark, whereas the other states are all up around 20%. The market has been performing very well in terms of rental returns in ACT and it is just starting to slow a little bit now. This probably has a lot to with the fact that a lot of the employment is strongly linked to the government, which is not hiring at the moment."
Rick Dickson, general Manager, Richard Luton Properties - Woden says Curtin is experiencing a lot of renovations at present, which has encouraged many renters into the area.
"Renters will pay top dollar for newer and better quality properties, so those dwellings with upgraded kitchens and bathrooms will be attractive," he says. "The suburb is in a good location and people would rather rent here than going further out. That said, Curtin has never had an abundance of properties to rent, so this has helped push the rental returns up."
Rick Dickson, general Manager, Richard Luton Properties - Woden says Braddon is popular for its newer units, which has also encouraged more growth in rental returns over the year to March 2009.
"Vacancy rates Canberra wide have been kept low over the last year, and rents have been going up and up. Tenants will pay more to rent in a newer market like Braddon just a few kilometres from the city because they can ride their bikes or even walk into the CBD. People have been trying to cut down on costs over the last year, so areas this close to the city are attractive to renters," says Dickson. "Braddon is located close to the defence quarters as well."
Kusher says all of the suburbs within the Northern Territory that saw the strongest growth in median rents for both houses and units over the 12 months to March 2009 are located within Darwin.
"Across houses, Fannie Bay in the inner Darwin area recorded the strongest (23%) median weekly growth. Stuart Park in Darwin's inner city also made the list, while Gunn and Woodroffe in Palmerston and Karama to the northeast were also suburbs which recorded strong growth in house rentals," he says."In the unit market, the suburbs which recorded strongest rental growth were located in the Darwin inner city, except Brinkin which is in the northern region of the city."
Phil Pethick from Darwin Rental Specialists - Coconut Grove says Fannie Bay has always been a very popular suburb for buyers and renters and always experienced good capital growth and rental return growth. "Fannie Bay is located right near the ocean and just minutes from Darwin's CBD, not far from Parap markets and many sailing clubs. It is quite expensive to buy in this suburb, but people like the prestige reputation there, so many tend to rent instead," he says.
Phil Pethick from Darwin Rental Specialists - Coconut Grove says Woolner is a much newer suburb, or small subdivision as it is commonly known, located very close to Darwin city centre. "Dwellings here are only a maximum of around 12 years old too, and many have city or ocean views, which attract people. If they can buy or rent something pretty new and live this close to the city, it is going to be popular," says Pethick. "It's only a two-minute drive into the CBD just 2-3 km away," he says.
Most of the fastest-growing rentals in WA are located outside of Perth, according to Kusher. Port Hedland and Wembley lead the charge. Riverton, which is located around 12km south of the CBD, was the only other top-performing Perth suburb with strong gains in house rental returns. Riverton houses, which grew by 22.1% over the year to March 2009, and Wembley houses which grew by 25% in the same period, remain quite affordable rental options.
Broome in the far north of the state and Boulder in the mining and resource area around Kalgoorlie also recorded strong growth percentages around 23%.
"Across units, Bunbury recorded the strongest growth of all WA suburbs, with 20.9% growth over the 12 months to March 2009. All other top performers are situated in Perth and all are inner-city areas situated within a 10km radius of the Perth CBD.
Zora Reeves, listing agent for Century 21 Wentworth Real Estate - Subiaco says Belmont does not have a large unit market and most units are located on smaller blocks with fewer lots.
"Belmont is an older suburb, but it is getting a lot of attention from renters and buyers because it is only 15 minutes from the city and people have realised that recent development in the suburb is really improving the reputation," she says. "A lot of people are now knocking down old houses on big blocks and building four to six townhouses on the block. The Graham Farmer Freeway which went in 10 years ago, also
makes the suburb more popular and easily accessible."
Wembley is located just outside the city and borders onto the more expensive suburb of Subiaco.
Zora Reeves says Wembley is a very popular area for student accommodation because it is affordable and close to Perth's CBD and the University of Western Australia in nearby Nedlands. "It is cheaper to rent in Wembley because the character houses are older and the high rise apartments need a lot of work, but this isn't expensive for investors. A lot of units in Wembley are getting makeovers at the moment," she says. "This suburb is located just north of the city and close to City Beach, Cottesloe Beach which attracts people to the area."
Park Ridge to the south of the Brisbane's city centre (within Logan City) recorded the strongest growth in median rents for houses from March 2008 to March 2009, according to RP Data. The suburb grew by 25%, from a median rent of $320 to $400 per week.
"The list of rental top performers for houses only has one other suburb of Brisbane - Nudgee - where rental returns grew by 23.5%, which is located to the northeast of the city. Oakey, which grew by 24.3%, is located in the Darling Downs, Hermit Park, which grew by 24.2%, is situated in Townsville and Hollywell, which grew by 22.6%, is on the Gold Coast adjacent to the Broadwater," says Kusher.
He says $500 a week to rent a house in Hollywell is still thought to be reasonable, considering the median house price is $900,000.
"Across units, Scarborough on the Redcliffe Peninsula recorded the strongest rental growth of 25%. Two other Brisbane suburbs (Yeerongpilly and Chermside) also recorded very strong growth, but neither are located within the inner city unit market. Outside of Brisbane Caloundra on the Sunshine Coast recorded 19.3% growth in unit rental returns and Belgian Gardens located in Townsville recorded 18.8%," he says.
Kusher says the new Mervack development in Yeerongpilly has contributed to the 21.2% growth it achieved in unit rental returns over the year to March 2009. This has also been the case for Scarborough and Chermside as well, which have grown by similar amounts.
"New developments add rental stock to the market and boost returns," says Kusher. "This can have a positive effect on rental returns for existing stock as well, and it has a positive effect on the entire market. With new housing development comes new amenities and infrastructure which bring people into the community."
Kusher says there has been a lot of rental growth in regional areas of Queensland because they are well established and have diversified economies. Townsville is the biggest city in northern Australia, which is why Belgian Gardens appears as one of the areas which has experienced strong unit rental return growth over the year to March 2009. Units in the area grew by $60 a week over the period, to rent for a median of $380.
Nudgee has a mixture of older and newer houses, and the influx of new housing has been of a higher quality says Kusher. "This has been a factor in
the increase in rental return values over the year to March," he says. "Those suburbs with newer houses are more likely to dominate the list of high achievers for Queensland."
Kusher says Chermside experiences a lot of popularity because of the major shopping centre located in the suburb and because of the new developments built around the shopping centre.
"There is also an emerging office market in Chermside as well," he says. "They're putting in the Northern Busway which will run to Chermside as well which will improve connectivity. It is one of those emerging precincts 10-12km out of the city which has bars, restaurants, cafes and amenities. They have built up the unit lifestyle around the shopping centre and rental return growth is likely to continue marginally there as more is to be developed."
Kusher says Leabrook in the Eastern Suburbs of Adelaide recorded the strongest rate of growth in weekly unit rents of all SA suburbs at 18.8%. "All of the suburbs on the list are within Adelaide. Only Glenelg, which enjoys a waterfront location, is more than 10km from the CBD," he says.
Chris White, from McGrath Real Estate Group says there has been a lot of unit development going on in Glenelg which is attracting tenants, but that has placed a lot of rental accommodation on the market, decreasing demand.
"The market will pick up again soon though," he says. "There are just quite a few 20-26 year olds currently living at home who are unsure of their employment future. This is a fair chunk of the rental market in the suburb, so once they get confidence back things should increase again. We're only half an hour from Adelaide city with regular tram and buses into the CBD, and we're a popular area for university student to rent because Flinders University is not far away."
Clarence Gardens in part of the popular south and south eastern suburbs of Adelaide located within 10km of the CBD. Kylie Schultz from Smallcombe Sanderson says it is this proximity to the city which attracts people to the area.
"The southern area of Adelaide is close to the city, has good schools and public transport with lots of bus stops, which makes it accessible and popular with renters and buyers," she says.
According to RP Data, the fastest-growing rental suburbs are located in outer areas of Melbourne because of the emerging working nodes. He says people are moving into areas such as Melton for the jobs at the airport. Rentals are affordable and most are located 20-30 minutes outside of the city in the 15-20km radius.
"Dallas in the outer north area of Melbourne was the top-performing suburb for houses in terms of rental growth over the 12 months to March 2009. Dallas and St Leonards remain affordable so they may have more rental growth to come," says Kusher. "Across-the top performing suburbs for median rent growth for houses all of those are located in Melbourne except for Bellfield. All these suburbs are located in the more affordable outer areas of the city, however St Leonards is actually situated in the Greater Geelong area."
Karmen Bonnici, a listing agent with Barry Plant Group - Craigieburn says Dallas has become increasingly popular for renters as it is the most affordable place to rent and is close to the city.
"A nice quality three bedroom house in Dallas will rent for the high $200s a week to the low $300s, yet the same property in neighbouring Faulkner (a more expensive town) would rent for the low to mid $300s straight away," she says. "This is why renters are becoming attracted to the area, and returns will continue as demand does."
Renee Reynolds, director, Release Property Management - Geelong says more renters are moving from Melbourne to the coastal areas for a sea change and more affordable rent.
"Many renters are even just using the properties here on the weekends, but it is more affordable to rent long-term accommodation on these coastal locations then it is to rent out properties for the weekend," Reynolds says. "Also, it is only 25 minutes from the CBD so people permanently renting here can still work in the city. As more people make this transition rental returns will increase even further."
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