With the current slowing of the Perth property market, rental prices are set to increase to previously unseen levels as more properties are taken up by potential homebuyers frozen out of the market. This is leaving extremely slim pickings for those attempting to secure tenancy in WA, which has experienced record-low vacancy rates of 1.6 percent in the December quarter of 2006. The shortage of supply has been particularly severe in the January/February period, the time when uni students traditionally snap up the properties in the lower price brackets.
Current conditions in Western Australia, and more broadly across the nation, will ensure prices continue to climb into next year. Purchasing a home has become impractical for a large proportion of first homebuyers, which ensures that they remain in the rental pool, creating more demand for housing. This high-demand environment looks set to continue into the future; with a climbing number of people entering the pool – through young people leaving home, more single-person households, strong interstate immigration etc.
With growth slowing in the residential property market, there is less opportunity for investors (landlords) to make such extravagant capital gains as in the past two years. Investors are therefore turning to other options to make the most of their capital. According to Ross Gittins of the Sydney Morning Herald, ‘the yield on a government bond is about 6 percent; the yield on shares is about 5 percent;’ while the net yield for rental property can be ‘as little as 1 percent’.
Investment solely for the purpose of leasing-out (vs for capital gain) is generally unattractive to the typical purchaser (vs the long-term investor). So as the capital-gains-focused investor provides the majority of new rental properties released onto the market, there is a resultant stifling of the supply of new rentals in a market characterised by a level of uncertainty.
Demand is currently running ahead of supply due to immigration and a lack of affordability; therefore, current landlords have their collective sights set on maximising their rental return. This is bad news for renters and great news for landlords, reflecting a market correction that is predicted to raise rental prices by around 35 percent over the next few years.
Supply is not the only deciding factor with regards to rental prices. However, a high level of supply (due to large-scale construction and investment) has kept rental prices down in Western Australia. The trend now will be for currently undervalued rental properties to reconcile the price difference in line with the recent rise in the cost of home ownership.
The major concern as a result of the housing boom has been that members of the younger generation will be unable to afford to own their own home. However, once the rental price reaches its peak in this current cycle, the benefits of renting, rather than purchasing will be largely the same as prior to the housing boom.
A recent study by Judith Yates, of the University of Sydney, shows ‘the median house price would need to be at least $100,000 lower for people in their 20s and 30s to be able to save a comparable deposit (in relation to income) as their parents did’ (Sydney Morning Herald).
However, there are a range of options available for young people to get around the prohibitively large deposit needed for a new home. One option is for parents to provide their house as collateral as their children enter into a mortgage; this generally allows them to avoid mortgage insurance, and, once established, there is enough equity in the house to hold the mortgage in their own right. As issues with home affordability deepen, we can also expect a range of ‘creative’ mortgage options from the banks.
The advice for perpetual renters remains the same: by investing what you would otherwise have paid for a mortgage, you can still come out in front; however, this requires more discipline than most people possess. Those with no choice but to rent will have to get used to the higher prices for now. As a prospective tenant searching in the current market, make sure you have your credentials ready to go, and be aware of your rights by visiting reiwa.com.
For those attempting to get into home ownership – consider the current market conditions. While the property boom has slowed, prices are still growing at ‘normal’ levels for Western Australia (10-15%) with no sign of a significant downturn. While some areas are potentially overvalued, there are still opportunities throughout the metro area. Prices are unlikely to decrease, so by delaying investment, you put yourself at a disadvantage.
Zac Whitely.
