Rents are rising by more than 20 per cent in some capitals, with average increases for houses around 15 per cent and units about 10 per cent because of stock shortages, according to SQM Research.
Gross rental yields range from 6 per cent in Darwin, 3.8 per cent in both Canberra and Perth and 3.5 per cent in Adelaide to 2.8 per cent in Melbourne and 2.5 per cent in Sydney, according to CoreLogic, which monitors property prices.
Louis Christopher, SQM’s managing director, says: “Investors can expect to see even higher rental yields as prices fall in some major markets.”
Low vacancy rates
Vacancy rates in Melbourne and Sydney are below 2 per cent and less than one per cent in Adelaide, Perth, Hobart and the ACT, says CoreLogic.
Predictions by economists, including Shane Oliver, chief economist for AMP Capital, that property prices will fall by between 10 and 15 per cent over the next 18 months will further boost the appeal.
Investors are also looking for a hedge against inflation and embracing generous depreciation and tax breaks, which the incoming Labor federal government has promised to retain, says Andrew Wilson, chief economist for property consultancy My Housing Market.
Labor is attempting to marginally ease the rental crisis by boosting supply through a $10 billion Housing Australia Fund to build 30,000 social homes over five years, and a Help to Buy scheme with the government taking up to 40 per cent equity in around 10,000 first home purchases.
Trimming back perks
The Greens, who hold the balance of power in the Senate, want property investors to be allowed negative gearing for only one property.
SQM’s Christopher says he wouldn’t be surprised to see a second-term Labor government make cautious moves to trim back some investment perks to cool over-heating markets.
That could affect sentiment among existing property investors, which include Prime Minister Anthony Albanese, who along with his Sydney home owns an apartment in Canberra and two Sydney investment properties.
Proposed increases in supply will take years to have a significant impact on demand and will be slowed by chronic labour and material shortages, plus complex planning rules, say specialists.
Growth in housing approvals is rising but is unlikely to resolve the nation’s predicted housing shortfall, according to analysis by the National Housing Finance and Investment Corporation.
Consultancy Charter Keck Cramer’s forecasts for Brisbane, Sydney and Melbourne predict this year’s 28,200 build-to-sell apartment completions across the three largest cities will more than halve to 11,400 by 2024. This is because of a decade-low commencement in new apartments last year thanks to the pandemic.
It warns of shortages in supply of east coast Australia’s build-to-sell apartment stock over the next two to three years, reinforcing earlier warnings of a looming rental affordability crisis.
Construction insolvencies have increased to 30 per cent during the past 12 months, reflecting serious cost and material issues.
Nerida Conisbee, chief economist at Ray White Group, the nation’s largest real estate agency, says: “Rising construction costs mean fewer homes will be built. Homes that are in the pipeline to be built will be delayed, in some cases indefinitely.”
Investor demand is also competing with rising interest for existing homes from owner-occupiers, she says.
Demand from investors is highest in NSW, which has the highest entry price and arguably less potential for medium-term capital gains, according to Tim Lawless, head of research for CoreLogic.
Lawless expects investors to start looking at markets like Brisbane, Adelaide and Perth, where prices are lower, prospects for capital gains higher and vacancy rates are below 1 per cent.
Commutable regional cities, such as Ballarat, around 100 kilometres north-west of Melbourne, and Newcastle, 160 kilometres north of Sydney, also continue to be popular with investors, say agents.
Apartments are typically more popular with investors than houses in major cities, because they are usually cheaper, cost less to maintain and offer higher yields compared to detached houses, says Patrick Bright, a Sydney-based buyers agent.
Median unit prices are around 30 per cent (or $290,000) lower than a median house price and gross rental yields are more than 80 basis points higher, says CoreLogic.
The accompanying tables showing top variable and fixed rates for a typical investor seeking a $1 million, 30-year, principal-and-interest rate loan reveal variable rates.
For example, the cheapest variable comparison rate of 2 per cent is between 70 basis points and 277 basis points cheaper than any of the top five one-year fixed rates.