Why Are Rents Down In SYD & What Can You Do About It?

Data released by Corelogic this week gave the unfortunate news to Sydney landlords that rents are down 2.7% over the last 12 months.

To make matters worse, all other capital cities around the country (except Darwin) recorded an increase in rents over the year.

So why is Sydney underperforming?

Like any movement of an economic market, it’s rarely due to just one factor. It’s usually a combination of many, all interlinked in some way. Here are some of the factors that could explain a decrease in rents:

The construction boom has increased supply dramatically

Walking around any Sydney metro area in the last 2-3 years, you would’ve seen more trucks, cranes and skip bins than you could count.

Sydney has undergone a huge boom in construction in the last few years, totaling many billions of dollars. Most of this construction has been residential housing (namely, apartment buildings).

Many developments have come to completion in the last 12 months and hence have become available for occupation by owners and tenants. This means that the tenancy market has more supply to choose from, decreasing the demand for rental housing and putting downward pressure on asking rents.

It can take a while for this new stock to be absorbed by the market, at which point demand will start to climb back up again. However, there are many more developments that will be completed in the next 5 years, so this strong supply/weak demand scenario could play out a little longer.

Sydney exodus

Ultimately due to the cost of living, Sydneysiders have been leaving the city/state in droves over the last few years, mainly to Queensland and Melbourne. In fact, Melbourne is tipped to be Australia’s largest city in terms of population by 2026.

This interstate migration is again reducing the demand for Sydney housing.

Flat wages growth

If wages aren’t growing, it's difficult for rents to grow. For rents to increase, tenants need more disposable income. This usually comes by way of pay increases. Let’s look at the statistic itself:

The 2.7% decrease in Sydney is the city-wide average. This means that some areas decreased, some areas remained the same (neutral growth), and some areas would have increased in rents.

Because there was a decrease, it has to mean that more areas experienced a decrease or remained stagnant than areas that saw an increase.

If wages were growing, we could assume that more areas would have recorded an increase in rents, which would have pulled the Sydney-wide average up some more, and the overall average figure wouldn’t be so bad.

How you as a landlord can navigate through this period

There are many tactics property managers employ to get your property leased fast to a good tenant. Below are three that I want to highlight for the current market conditions:

1. Be realistic in your rent expectations

If your vacating tenant is paying $600 per week, it doesn’t necessarily mean that the current market will pay $600 per week.

If your market has come back in the last 12 months, you will need to adjust your asking rent to meet the market. Otherwise, you’ll spend too long vacant (and you may have well just dropped the rent anyhow, insofar as the annual rent is concerned).

Do your research, compare apples with apples, and if you’ve hired a great property manager, listen to their advice.

2. Understand that vacancy rates are rising

The vacancy rate is a great metric for measuring the health of the tenancy market, however, it is a lagging indicator. It usually tells you (after the fact) that landlords have been asking too much. Many areas across Sydney are experiencing rising vacancy rates at the time of writing.

If the vacancy rate is rising in your area (if you’re unsure, ask your property manager), take the hint and price competitively.

3. Present your property better than your direct competitors

Firstly, let’s define your direct competitors: These are the properties in close proximity to yours, with the same number of bedrooms/bathrooms/car spaces, are of a similar age, size, aspect, internal design and property features. An obvious example is a unit in the same building as yours.

Tenants can be particular about what they want, and they will be making their decision based on the factors above.

For example

A tenant is looking for a 2 bedroom, 1 bathroom apartment with a car space, less than 10 years old with an internal floor area of 80m2, an updated kitchen, and a dishwasher. Let’s assume that along with your property, there are 3 other matching properties also for lease close by.

You can be sure that the tenant will be looking at and assessing all four properties, and they’ll either make an emotional decision based on the look and feel of the property, or an economic decision based purely on the rental figure.

To secure this tenant, you had better present your property better than your 3 competitors, or price it under the other 3, otherwise, your competitors have a better value offering, and you will be on the market for too long.

Wrapping up

If you’re new to property investing you may not have seen a market pullback at all. Get used to it. If you invest for the long run (which you should), you’ll see many more.

Adapt to suit the market, don’t be afraid to change your tactics and learn from each one.