Wood Property

Rising rents – Construction falling. Wait …what?

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How can we have a situation of rising rents but construction falling?

You can’t turn on the TV or pick up a newspaper without seeing stories about the shortage of rental property and rising rents.

In response to the housing shortage, we would expect to see a boom of new construction meeting that demand. Oddly, quite the opposite is happening. New apartment approvals have slumped to a 10-year low nationally. Why is that?

Australian Bureau of Statistics this week announced apartment approvals are at a 10-year low. Or the same as 2013 when we had 2.5 million less Australians. Recently, property market commentators have opined on this issue citing several reasons including.

  1. A slow and opaque town planning process
  2. Rising construction costs
  3. Labour shortages
  4. Rising financing costs for developers and apartment buyers.

With no end in sight to relieve any of these issues, we can expect new housing supply to remain low for some time which means the rental crisis may yet get worse.

The rental vacancy rate is between 1%-2% in all capital cities (below 1% in Adel). The vacancy rate is measured by two things.

  1. The turnover of current rental accommodation and how long it takes to lease.
  2. The availability of new rental accommodation coming onto the market.

In the current market, we are seeing less turnover, faster letting times, and virtually no new supply, meaning the vacancy rate is plummeting and rents are rising.

Apartment investment owners are sympathetic to their renter’s plight. However, investors have their own challenges such as rising interest rates, new land tax charges and additional compliance costs. Investors need to ensure their investment remains viable. Balancing these competing needs is not easy.

The median rent is calculated from the advertised rent for vacant apartments. It does not include the rent paid by a sitting tenant who has just had a rent increase. (Unlike sales, leases or rents are not registered anywhere.)

We are seeing a slowdown in rental turnover because the passing or current rent being paid by an existing tenant is often less than the advertised rent for a comparable vacant apartment. Sitting tenants are not moving and this is partly to blame for the decline in vacancy rates detailed above. It’s like a two-tiered market and any type of rental control would amplify this problem.

To escape the confluence of events causing rising rents and low housing supply, something (or some things) needs to change.

Immigration and the rising need for housing generally is an immovable force. So, expect to see continued rising rents for some time until planning approvals get easier, construction costs ease and labour shortages free up. This will hopefully spark a wave of new apartment construction to provide the much-needed housing but this could be 5 years away.

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