More tenants in the future as first home buyers get stuck in the rent trap

Unfortunately, this year will not bring good tidings for the thousands of Australian tenants trapped on the rental roundabout.

Rising interest rates and the ever increasing cost of living are making it virtually impossible to penetrate the housing affordability barrier for would-be first home buyers who face a double dilemma; the difficult task of trying to save a deposit while paying for groceries, utilities and the weekly rent and the increasing cost of home ownership.

And things are set to get worse for them this year as they’ll have less money left over to save their deposits as already low vacancy rates set to cause a significant increase in rents during 2011.

Their confidence is likely to be further shaken with interest rates predicted to increase in the second half of the year.

This means there will be more Gen Y tenants over the next few years and while some will want to live in the outer suburbs, most will choose to rent apartments close to their work, or close to lifestyle locations and close to the CBD. With little new rental stock coming on line in these locations in 2011, it is likely that rents will rise strongly over the year.

Latest figures from SQM Research reveal that national vacancy rates for December last year were sitting at 2.2% – a slight increase on the 2% recorded for the same time in 2009.

Of all the capital cities, Melbourne tenants are seemingly in the best position, with the December vacancy rate at 3.6%, while Canberra had the tightest market at only 0.9%.

Hobart, Adelaide, Perth and Sydney vacancy rates all came in under 2%, at 1.3%, 1.4%, 1.5% and 1.7% respectively, and Brisbane and Darwin both recorded vacancies at 2.8%.

Head of SQM Research Louis Christopher says that although the Sydney and Perth markets have experienced a slight easing in vacancy rates from those recorded for 2009, this is most likely a short-term reprieve. He predicts things will get tougher for tenants in most capital cities during 2011, as the number of rentals remaining vacant for three weeks or more decreases.

The only city which will perhaps prove more tenant friendly in terms of available properties is Melbourne, where a glut of new apartment stock began hitting the market late last year, with more developments expected to come on-line over the next 12 months.

As a result, Christopher says it’s unlikely rents will rise by much more than 1 to 2% (if at all), in the Victorian capital, where vacancies are already over 3%.
“Between 3 to 4%, it is a market in equilibrium. At over 4% it starts to become an oversupplied market,” says Christopher.

While this is good news for tenants, Melbourne landlords will not be so happy about the city’s current saturation of rental stock and Christopher’s forecast of minimal or zero rental increases over the next 12 months. Of course, this situation will turn around as demand for accommodation continues to rise in Australia’s “most livable city” and the current apartment over-supply is absorbed.

Nationally, Christopher says rents could rise by 3 to 5% for 2011, while Sydney tenants could be hit with a minimum increase of 5%, with rents potentially soaring by as much as 9%.

Christopher says a lot of tenants are now seeking more affordable accommodation in the outer suburbs of our capital cities.

“Since we do have a bit of an affordability problem… many would-be first home buyers are renting in an affordable location first so they can save, so they’re moving out to the outer ring to rent,” he says.

There’s no doubt that many potential first home buyers will be waiting to see what happens with interest rates as we progress through 2011 before jumping into the property market. And while this will continue to make competition for rental properties tougher on tenants, it does spell good news for investors who can look forward to increasing yields.

At this stage of the property cycle, when capital growth is slower, rising rents will in turn boost total investment returns and make life easier for property investors who are facing increasing monthly mortgage repayments. The key is to make sure your property management team is proactive when it comes to reviewing rises in your local rental market that you can benefit from.