Property managers should focus on keeping good tenants to avoid rental drops, as rents are beginning to plateau in capital cities.
Recently our eastern seaboard capital cities have experienced a particularly exciting run in terms of capital growth. Since record low rates enabled investors to jump in to the property market with ‘cheap money', we've seen some huge changes; and not all have been positive. The most common question clients have asked me has related to their expectations not being met when they've just anticipated that rents always go up.
As I say to people: “This can be easily explained… I've got bad news and good news!”
If we track rental in metro cities, it has trended upwards over the long term, and generally at a similar rate to that of capital growth (around four to eight per cent depending on property type and location). However, this growth doesn't trend in a straight line and it doesn't run in a positive trajectory at the same time as capital growth runs. In fact, these two data sets often tend to run counter to each other. Recent history shows that when we have stronger-than-normal growth over a peak period (like what we have had now since 2013), we have lower-than-normal rent; and vice versa. In 2011 to 2012 when we had our terrible run and values dipped back, rents in our capital cities were going strong.
The reason for this is simply supply and demand in the investor/tenant pool. Right now, we've had an extraordinary run with our property price growth and it’s been almost exclusively driven by our low interest rates. Despite the pre- and post-GFC spikes, our current run shows moderately strong capital growth over a far longer and more sustained period compared to the spikes.
Money has been cheaper than ever (for longer) and investors have taken advantage of this and investment property purchases have spiked dramatically (up until just recently when APRA instigated their changes).
Not only have we had investors flocking onto the market in droves, we have also had tenants bailing out of the rental market and finally taking the opportunity to buy their own first home (many of these tenants were precluded from the market when interest rates were higher).
So the imbalance we've had over the last two years has meant fewer tenants and more investment properties. It’s placed pressure on rents and plenty of sensible property managers are begging their landlords to focus on keeping good tenants (albeit at the same rent or even lower) in an effort to avoid vacancies or dramatic rental drops. Many investors (including myself) have had to drop rents in reaction to this change of climate.
The good news is that from a capital growth point of view, over the last two years, most investors who have bought quality properties in stable areas have experienced capital growth on their properties. It’s a double-edged sword, and it highlights the importance of making sure cash flow estimates are buffered, vacancies are factored in, rental increases are not relied upon and property managers are well-selected and patiently listened to.
Cate Bakos left a career in chemistry to go into the property industry back in 2003. Her experience as a listing agent and mortgage broker put her in good stead to work with buyers and to shape investor experiences.
In 2013 Cate was a finalist for the Telstra Business Woman of the Year and a finalist for the REIV Buyer's Agent of the Year
Cate left her former employer and directorship in 2014 to launch Cate Bakos Property; a boutique Victorian based Buyers Advocacy business catering to her loyal clients. To find out more about Cate Bakos Property, visit www.catebakos.com.au.