Fast-rising rents and subdued prices have opened the door to investors seeking to start a portfolio or return to the property sector after many sold to reap the profits when values hit their peak last year.
New rental listings have fallen 12.2% to their lowest level since 2003, and total supply in March was down 24% year-on-year, according to new data from REA Group’s PropTrack rental report.
Rental prices are up 4.7% in the year to March – the strongest growth since 2015.
The report says demand for rental property has increased 37.1% year on year, and has hit historical highs in every capital city.
REA’s director of economic research, Cameron Kusher, said: “The lack of supply has been exacerbated by many former landlords selling their investment properties.
“With most of this stock purchased by owner-occupiers, it has reduced the overall supply of stock in the rental market.”
While the prospect of future interest rate rises dampened prices, leading industry researcher CoreLogic predicted apartment values would be more resilient than house values in the medium term.
In its monthly Unit Market Update, CoreLogic said while houses had recorded stronger quarterly value growth (4.9%) to the end of March, growth was decelerating.
Increases in unit values (3.8%) have been steadier since last July’s market peak.
CoreLogic reported that the unit segment “may be more resilient relative to houses as the property market inches towards the downswing phase of the cycle.
“Unit capital growth cycles have historically seen less volatility than houses. As a result, the downswing in prices is expected to be less than for the detached house segment.”
For first-time landlords, investing in a rental unit may be timely.
A critical part of any investor’s decision-making is calculating the yield, which represents the annual income as a percentage of the property’s cost or market value. When prices go up, the yield usually falls.
According to CoreLogic, average yields have fallen from 5-6% to an average of 3.5% because of the 20%-plus growth in values over the past 18 months. This encouraged many landlords to sell and enjoy a capital gain, creating the current shortage of rental properties.
With prices flattening and rents rising, CoreLogic predicted the all-important yield ratio will begin to return to historical averages.
For any investor, it’s important to establish your financial goals before making a purchase. For example, while a higher yield will be positive for cash flow, the property may not deliver a medium to long-term capital gain.
Talking to a broker and financial adviser is a sensible approach to beginning an investing journey or re-entering the rental market.