This is a wonderful time to be a property investor, with property rents increasing sharply and other key indicators also looking favourable.
In the 12 months to September, the national median rent jumped 8.9%, according to CoreLogic. That’s the strongest annual growth rate since 2008.
Furthermore, rents increased three times faster than prices throughout the wider economy – because while rental growth was 8.9%, the national inflation rate was only 3.0%.
Australia’s regional markets experienced a 12.5% increase in rents over the year to September, compared to 7.5% for the capital cities. The city-by-city breakdown was:
To understand why property investors have been enjoying stronger rents, you need to look at data on vacancy rates.
(The vacancy rate is the share of untenanted rental properties in a particular market. For example, if there are 100 rental properties and 98 have tenants, the vacancy rate is 2%.)
Over the year to September, the national vacancy rate fell from 2.0% to 1.7%, according to SQM Research. Meanwhile, vacancy rates fell in every capital city – with Sydney experiencing the biggest reduction, of 0.8 percentage points.
The lower the vacancy rate, the harder tenants have to compete for accommodation. That, in turn, makes it easier for property investors to not only find tenants but also charge them more. So as vacancy rates have been falling, investors have been raising rents.
Furthermore, vacancy rates are historically low in most capital cities. When vacancy rates are:
With that in mind, Melbourne is a tenant’s market, Sydney is a balanced market, Brisbane is a landlord’s market and the other capitals are very strong landlord’s markets.
One note of caution – a vacancy rate for an entire capital city can hide significant variation between suburbs. For example, while Sydney’s vacancy rate was 2.7% in September, that included vacancy rates of:
So during the year to September, the national median rent climbed 8.9% while the national vacancy rate fell from 2.0% to 1.7%. During the same period, Australia’s median property price rose an extraordinary 20.3% (while Sydney’s rose 23.6%), according to CoreLogic.
For the typical property investor, that’s a wonderful trifecta because it means:
However, there is one downside – yields are falling, which is what happens when prices grow faster than rents.
(The yield is the property’s annual rent expressed as a percentage of the property’s value. So if a property is worth $1 million and it earns $30,000 in rent per year, the yield is 3%, as $30,000 is 3% of $1 million. The higher an investor’s yield, the stronger their cash flow.)
During the year to September, the national yield fell from 3.71% to 3.56%, while Sydney’s fell from 3.01% to 2.72%.
If you’re thinking now is a good time to buy an investment property – well, you’re not the only one.
Investors took out $9.6 billion of home loans in September, according to the Australian Bureau of Statistics. That was:
Property investment can be a great way to build long-term wealth, because you can use the bank’s money to buy an appreciating asset. Then, once you’ve built up enough equity in your property, you can borrow against that equity to fund the deposit on a new investment property.
To succeed with property investment, you generally need to buy a quality property in a quality location and hold it for the long-term. It’s also important to have financial buffers in place, so you can keep meeting your mortgage repayments even if you lose your job or interest rates rise.