At times of slower property price growth, or no price growth in some areas, property investors count on rising rents to boost their investment returns. The fact is, since the beginning of 2006 rental growth across the combined capital cities has outpaced the growth in home values.
BY MICHAEL YARDNEY
The following table from RP Data shows that over the last six years capital city home values have increased by 34.5 per cent, compared to rental rates that increased by 46.8 per cent.
Nationally, rents have grown by about five per cent in the last year, with vacancy rates generally sitting below two per cent due to strong demand and limited supply.
The rental markets are fragmented
Currently the Sydney, Perth and Canberra markets are particularly strong due to a low level on construction of new accommodation. This is expected to place upward pressure on rentals.
On the other hand, while rents are still rising in Melbourne, Adelaide, Hobart and Darwin, the markets are not as tight.
According to Gerard Haines, department head of Metropole Property Management Sydney, his team is experiencing strong demand from tenants, particularly in the inner-west where vacancy rates are less than one per cent.
“This region is gentrifying and there is strong demand from a wide demographic of tenants who want to live close to the CBD in these up and coming lifestyle suburbs,” Haines says.
“There’s also strong demand and restricted supply in Sydney’s eastern suburbs, and rents are likely to keep rising in those areas.”
Peter O’Brien, head of Metropole Property Management in Melbourne, tells a different story.
“While the overall vacancy rate in Melbourne as reported by the REIV is around 2.4 per cent, and there is strong demand from tenants for well located properties in Melbourne’s inner and middle ring suburbs, there are some pockets of Melbourne where the vacancy rate is double that and tenants have the upper hand,” he says.
SQM Research reports a vacancy rate of around 8 per cent in some western Melbourne suburbs like Point Cook, Tarneit and Melton. The Melbourne CBD is also suffering with an oversupply and the situation is likely to get worse with over an estimated 5000 to 7000 apartments coming onto the market in 2013.
To make matters worse, according to property consultancy Charter Keck Cramer, there are 17,860 apartments under construction in Melbourne with another 16,850 apartments still being marketed across the city.
Rental growth is slowing
The latest figures from Australian Property Monitors (APM) show national weekly rents for houses remained steady for the first 3 months of the year and rents for units fell 1.1 per cent.
While asking rents dropped in Melbourne and Adelaide, some markets are still performing strongly, according to APM.
Year on year rent growth was highest in Darwin (up 11.8 per cent); Perth (up 3.9 per cent), Brisbane (up 2.7 per cent) and Sydney (up two per cent).
The bottom line
We are at that stage of the property cycle when capital growth is slower and rental growth is strong. But the divergent performance of our rental markets just goes to show that buying the right property in the right location is, as it always has been, the key to successful investing.
For your investment to perform well in the long term you need to own the type of property that will be in continuous strong demand by a wide range of owner occupiers, who will push up prices in the area, and tenants, who will pay you rent.
Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog