What's causing the "critical" undersupply in rental markets?

By Gerv Tacadena | 10 May 2021

Australia's rental markets are currently under a "critical undersupply" as investor activity softens, according to the latest analysis by the Property Investment Professionals of Australia (PIPA).

The analysis showed that some smaller capital cities are currently struggling with substantial undersupply of rental properties as vacancy rates hit record lows.

Recent reports from SQM Research show that over the period covering March 2017 to March 2021, vacancy rates have fallen substantially in Brisbane (3.5% to 1.5%), Perth (5% to 0.9%), and Adelaide (1.7% to 0.8%).

Even in major markets of Sydney, Melbourne, and Queensland, undersupply was also apparent, said Peter Koulizos, chairperson of PIPA.

“Vacancy rates in inner-city Sydney and Melbourne have spiked over the past year due to the loss of international students and overseas migrants, but even many suburbs in these cities are also experiencing an undersupply of rental properties,” he said.

Koulizos said this undersupply was a result of the lending restrictions introduced in 2017 that dampened investor activity.

The declining investor presence was quite apparent, particularly in May last year when activity from the segment slumped to a 20-year low. Activity has dropped by about 50% since the start of the restrictions.

"Back then, the restrictions came into effect because of the strong property price growth in Sydney, but investors everywhere were also blocked from securing finance even in markets with benign market conditions at the time, such as Perth, Adelaide and Brisbane," Koulizos said.

Given the situation of the rental market, Koulizos believes it is crucial for policymakers to not make the same mistakes in their strategies to control investor activity.

"Instigating policies to solve a supposed short-term problem can have long-term ramifications, which is the drastic situation that tens of thousands of tenants are now experiencing," he said.

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