How will the virus crisis impact rents

As the economic fallout from the unprecedented social distancing measure only continues to increase, many Australian’s are likely to find it hard to pay their rent.

On the flip side, this also puts property investors and landlords in a tricky situation as they could now be facing a period of six months, where they might not receive any rent while not being able to evict their tenants.

While the Government has been trying its best to stimulate the economy and protect as many jobs as possible, what will happen to the rental side of housing remains a little unclear at this stage.

With a significant portion of investors being negatively geared they are already being forced to make up the difference between the rent they receive, and their mortgage repayments.

The banks have been able to assist borrowers by offering to defer loan repayments, with interest to be capitalised. In the short-term, there does appear to be a lot of uncertainty around how people might pay the rent and if that could mean that it will ultimately be landlords who foot the bill.

At the same time, we’re already seeing a sharp increase in rental properties being listed according to Domain, as previous short-term rental properties start to seek the security of longer-term leases.

Rents to rise long-term

John Lindeman Founder of the Lindeman Reports believes we are going to see two very different periods in the current rental markets. Falling rents in the short-term, followed by a period where rents will sharply increase.

“We’re already seeing a collapse in short-term rentals, with holiday letting and AirBnB basically closing up shop.”

“Most of these people just own one property and are now trying to convert to long-term rentals. While tenants themselves are also trying to look for cheaper options.”

“What we’ll see in the short-term is that rents will probably go down. There’s also the six-month rent eviction rule, which could tempt some people into not paying rent at all. Although that would impact their tenant record.”

Although rents will likely fall in the near-term, Mr Lindeman points to what happened during the Great Depression as a guide to what we could see happening over the next few years.

“The Great Depression occurred over many years, and the rents went up significantly over that period of time. And that’s what I think is going to happen here.”

“We are likely to get a short-term reduction in demand, but in the longer-term, there will be fewer people who will be able to buy properties, while we will still have overseas arrivals, so demand will go up. While the number of people holding properties will likely decrease - particularly investors.”

“In the short-term people might even try to sell their properties, if they are having trouble collecting the rent.”

“From that point, I think rents will start to go up dramatically in the next few years and that’s what happened in the Great Depression. At the worst of it, rents were up to 50% of household income, so you can imagine what that would be like now.”

Mr Lindeman suggests there will be an opportunity for investors going forward, particularly in areas where there is strong rental demand.

“Invest in areas that have high rental demand such as higher-density urban areas. As they are the areas where rents will go up the most.”

Unheard of considerations

Steve Douglas, Executive Chairman at SMATS Group feels that while this crisis will end quicker than many suspect, there are some very different consideration investors now need to account for.

“I think this is a situation that will blow over quicker than many people anticipate as most can’t comprehend just how much stimulus is being thrown at this.”

“But we do have to think about things that we didn’t think about before, such as if you are going to rent your property will you actually get paid?”

“Vacancy has been a minor consideration in Australian property investment for years and now you might get a tenant that ends up with squatter rights. Things that we didn’t think about before that we will have to consider.”

“These are not things that are familiar with us in our culture. But neither was shutting the borders. Neither was not going to the football.”

Mr Douglas also feels that there will be significant fallout for rental markets after Australia effectively closed its borders - but longer-term the situation will reverse.

“The one thing many property industry people don’t seem to be realising is the impact of closed borders. Australia’s property market has benefited greatly from incoming migration and population growth. With borders now effectively closed, the tenant pool will stagnate for the period travel is limited.”

“Only when these people movements recommence will we see positive signs of stabilisation and recovery. Australia is likely to be seen as a preferred destination due to the powerful Government action and relatively modest infection and death rate, so don’t be surprised to see it become even more popular as a relocation destination on the other side of the crisis.”

Issues for landlords

Peter Koulizos from The University of Adelaide feels that there is no avoiding the short-term pain from the coronavirus for investors.

“Rents will drop for two main reasons. Firstly, there will be less demand as young people move back to the family home, temporary residents move back to their home country and tenants in general look for other options such as share houses, boarding houses, etc. will come about because of the increased unemployment and overall reduction in incomes.”

“Secondly, supply will increase as people put their short term rental properties such as AirBnB and holiday homes on the long term rental market.”

“Housing finance will not tighten - it will probably loosen, so as to get the housing market and economy going again.”

Mr Koulizos feels that landlords will need to be flexible going forward or they could run into more issues.

“If tenants leave their current property, it will very difficult for investors to firstly find tenants and secondly, willing to pay the current rent.”

“Investors will need to be more flexible with their lease terms and consider extra options, other than the typical 12 month lease. Shorter term leases and allowing tenants to have pets will open up the opportunities to find the right tenant at the right rent.”