With rental demand strong, it’s likely that landlords will raise rents when their leases expire in 2011 to compensate for higher interest rates, particularly given rents have remained virtually unchanged this year.
Independent property researchers, RP Data, report no increase in rents across the board in the September quarter, with Australian homes maintaining an average of $350 per week nationally and $370 per week across the capital cities. Over the past 12 months, rents have increased by less than three per cent, which is less than half the long-term average growth of around seven per cent.
If you’re a potential investor, don’t let these numbers concern you. Rents have risen dramatically over the past five years and as the property market is cyclical, if you take a long-term view, you’ll do very well.
However, with interest rates rising again, it’s very likely that city landlords will seek to recover these costs with a rental bump. They may lose the current tenant but our ever-increasing population means demand will be strong enough for them to find a new one pretty quickly. An additional factor in 2011 will be lesser activity among first homebuyers due to higher interest rates, so they’ll remain in the rental market.
Slightly different story in regional areas. Rents are unlikely to rise in towns that are heavily reliant on tourism, particularly while the dollar is so high. However, in regional areas where there is a variety of industries supporting local jobs and incomes, there may be room for landlords to make a small upwards adjustment.
While growth in rents has been comparatively low in 2010, rents remain strong at five per cent yield or more and renters are definitely feeling the effect. Nationally, we’re seeing more demand for smaller homes right now and this indicates price sensitivity among renters.
In the September quarter, three-bedroom houses were more popular than four-bedders and one-bedroom apartments were more appealing than two-bedders. (With apartments, this is also symptomatic of a long-term trend in more people living alone, hence apartments suit them more so than houses.)
Here are the top five capital cities, ranked by growth in house yields in 2010
Here are the top five capital cities, ranked by growth in apartment yields in 2010
If you’re a potential investor, let me answer what is probably your top question – house or apartment? I’ve always leaned towards houses particularly in Sydney where land supply is limited. But I don’t consider apartments to be the poor cousin investment to houses. Firstly, they’ll achieve a higher yield. Also, over the past five years, growth in apartment rents has been higher than houses. Secondly, since 2005, growth in apartment values has actually exceeded growth in house prices. The thing is it’s much easier to increase the supply of apartments than houses so these numbers could change in the future depending on building approvals and available sites. So I maintain that houses are a slightly better pick.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.