The Litmus Test

When it comes to media reports about the property market, most of the time the headlines will focus on the prices being achieved, the likely future direction of prices, or auction clearance rates. But if you’re serious about understanding the overall dynamics at any given point in time, there’s another whole aspect of the industry that needs to be considered.

We’re talking about property management. The data around rentals is important because it’s estimated that around 2.6 million of the circa nine million dwellings in Australia are owned by investors. What’s happening in this segment will affect the overall market, making it an important litmus test for owner occupiers too.

Here’s an example; let’s say vacancy rates are rising and rents are falling (these two things will generally happen in tandem due to the fundamentals of supply and demand). Investors will leave the market because the yield will be too low, either selling their properties or not entering into purchases. The potential outcome will be more properties for sale and less competition for them – meaning prices are likely to fall.

So what is happening in the Australian rental market? COVID-19 sent a lot of tenants back home to mum and dad this year and with many of those who do have jobs continuing to work from home either some or all of the time, others have moved out of the inner cities for a better (and cheaper) lifestyle. In areas that traditionally house international students, this tenant segment is entirely missing. All of this is affecting vacancy rates and therefore asking prices.

After a long lockdown and with no firm end in sight, Melbourne’s overall rental vacancy rate hit a record 4% in September, more than double the long term average. Things were worse in the inner city with a vacancy rate of 13%, causing rents to fall through the floor.

In Sydney, the vacancy rate is now the highest it’s been since 2003 at 4.5%, with the inner city vacancy rate rising from a long term average of 0.8% to a whopping 5.8%. Anecdotal reports suggest asking rents are falling by as much as 40% in some cases.

Compare this to Brisbane. The vacancy rate across the city is actually falling and currently sits at just over 2%. In our offices across the northside, we’re recording a vacancy rate of zero – some properties are actually renting for above the asking prices as incredibly strong demand results in 100 or more enquiries in some cases – many from those seeking to move out of the inner city.

But Brisbane has an additional dynamic at play, too. The city itself has also become a region of attraction for interstates seeking a better lifestyle as well as attracting interstate property investors seeking decent yields.

Perhaps most interestingly, Westpac Economics is now predicting 20% price gains in Brisbane property prices between 2022-2023, fitting perfectly with the idea of the rental market’s performance being the litmus test for future price direction.

We can already report we’ve seen a decline in the average number of days to sell a home over the past few months, while prices have been holding firm. There’s clearly a momentum that’s steadily building.

All the best,

Robert Green