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Q3 2019 Rental Review

Q3 2019 Rental Review

Overview

With RBA cutting interest rates and unbelievably high auction clearance rates (nearly 80 per cent) all over the news, Xynergy Realty takes a closer look at the changes happening in the rental market during the third quarter 2019 (Q3 2019). 

CoreLogic’s latest report suggests recovery of dwelling values as it increased by eight-tenths of a per cent in August, which was the largest monthly lift since April 2017. This quarter, CoreLogic had reported that Melbourne dwelling values increased by 3.4 per cent over the three months to September 2019. Even when the rate of decline losing momentum, the national rental market remains soft with rents recording a further fall of -0.1 per cent over August 2019; the third consecutive month of negative rental movements. 

Figure 1. Annual change in rental rates – National

Following the housing market boom in late 2017, national rental rates have been in steady decline. Tim Lawless from CoreLogic predicts that this quarter has shown signs of softening decline rates, hence we can expect steady growth in national rental rates in Q4 2019.

Despite the national decline in rental rates, Melbourne still enjoyed an increase in rental rates over the past year. Compared to Sydney’s decrease in annual rental growth by -2.2 per cent, Melbourne had increased its annual rental growth by 1.2 per cent recorded in September 2019 by CoreLogic. According to theestateupdate.com.au, there are some underlying factors that affect rental rates, such as:

  • Changing markets – includes macroeconomic changes such as inflation, cash rate, and regulation changes.
  • Property maintenance – if the property is occupied by a lot of tenants and is considerably old, maintenance costs might be higher and would reflect on rental rates.
  • Property values – the landlord might have made upgrades to a property, or new amenities have been added to the area.
  • Profit incentives – as landlords are not legally obligated to provide a reason to charge high rental rates, they might increase it to gain extra profit.

Changing markets and property values definitely had an impact on the rental market, as interest rates are now at a record low, APRA softening its regulations as well as ever-increasing dwelling values.

Given the high popularity of apartments in Melbourne, rental rates for apartments enjoyed growth while rental rates for houses remained static, says Mr Wiltshire from Domain. Melbourne’s inner region shows the largest rise in median unit rents by 4.4 per cent to $470 per week over the past year.

Source: Domain Rental Report, September Quarter 2019.

Since demand for houses is not as high as apartments, median house rents remained at $430 per week over the September quarter and the past year.

Source: Domain Rental Report, September Quarter 2019.

Rental Yield Growth

Even with the increase in median unit prices, Nicola Powell, Domain’s senior research analyst said that the growth across all Melbourne regions was not as fast as expected, rising by just 2.4 per cent last quarter, in which it rose by 5 per cent at the same time last year. With the rise of many new developments, Melbourne is expecting to have a surplus of rental stock in early 2020. This would provide prospective tenants with more opportunities to find suitable accommodation. Also, it would balance the strong population growth that Melbourne was able to maintain.

Rental Yield Growth Snapshot

Source: CoreLogic, 2019.

Tim Lawless from CoreLogic reported that gross rental yields are generally still higher compared to a year ago across most regions, with Melbourne currently standing at a gross rental yield of 3.5 per cent. Despite yields trending lower, rental returns are much better for landlords at this stage compared to when values peaked in 2017 and yields reached a record low of 3.4 per cent. The reason behind this is due to currently low mortgage rates, which is expected to continue that makes the yield from residential properties looking very attractive, especially when including capital gain. With current fixed-rate mortgage rates generally around 3.8 per cent, which is almost equivalent to the combined capital yield, the housing market continues to be increasingly attractive to potential investors.

Vacancy Rates

Eliza Owen from Domain suggests that even though there was a slight increase, Melbourne still ranks as having the fourth-lowest capital city in terms of vacancy rates. Melbourne stands at 1.8 per cent recorded in September 2019. Sydney and Darwin currently have the highest vacancy rates at 2.9 per cent and 3.4 per cent, consecutively. Domain group had mentioned that in Melbourne specifically, the largest increases in vacancies over the month of September were seen in areas such as North Melbourne and Carlton. James Nihil from Patrick Leo fully supports Melbourne as a solid choice for a smart investment destination due to strong support from government infrastructure spending, robust population growth and stable local economy. By 2031, Melbourne is set to surpass Sydney to be the largest Australian capital city.

Melbourne Rental Vacancy Rates

Future Outlook

Based on the results of Q3 2019, even when rental yields continue to soften, the trend of decline have seen improvements and landlords still receive better returns compared to the peak of the property market in 2017. With dwelling values continue to be on the rise and better rental returns, investors are forecasted to be more encouraged to participate in the real estate market. It will be the ideal time for first home buyers to secure their home now, when mortgage rates are trending low, and housing loan approvals rose significantly.

Source:

Domain, CoreLogic, smartpropertyinvestment.com.au, REIV, theestateupdate.com.au

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Cathy Sindarto

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