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A Sydney-based mortgage broker has warned investors to brace for lower yields in outer suburbs as new housing supply weighs on rental growth.
wHeregroup director Todd Hunter said investors with existing housing stock will be forced to compete with new house and land packages in the outer suburbs, creating a race to the bottom on rents.
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Speaking on the latest episode of The Smart Property Investment Show podcast this week, Mr Hunter speculated that the sheer number of investments in the outer suburbs of Sydney and Melbourne, driven by the strong price gains in each city over the past few years, means that tenants are now spoilt for choice, with many opting to add to their commute time in favour of a newer property.
“In these cities like Sydney and Melbourne – which is very generic, we’re talking about two capital cities here, there’s lots of markets within those markets – you’re seeing prices that have increased significantly, you’re seeing lots of new housing stock come onto the market and that all puts pressure on rents,” he said.
Investors in Sydney’s western suburbs are particularly susceptible to this new competition, according to Mr Hunter.
“In that sort of western Sydney [area] you’ve got new land releases, you’ve got investors who are paying an absolute premium for new house and land packages and then because so many are coming on the market they’re realising they can’t get the yields that they were getting, so they reduce the yields,” he said.
“That puts that rental dollar now back in the bracket towards where some other people who have already bought established properties are there, and tenants are saying ‘Well, do I go to a house that’s five, six maybe eight or 10 years old, and pay so and so dollars, or you can actually get almost the same or exactly the same on a brand-new house’. So they’re attracted definitely to the new house, and they might be a suburb or two further out but they’re willing to do that for a newer property.”
Mr Hunter’s comments come as CoreLogic RP Data’s review of the national rental market found that rents increased by just 0.3 per cent in 2015 – a record-low rate of annual growth (based on records back to December 1996).
The only cities to see an increase in weekly rental rates were Sydney with an increase of 1.9 per cent, Melbourne (2.2 per cent), Hobart (0.6 per cent) and Canberra (1.9 per cent), while rates fell in Brisbane by (-0.3 per cent), Adelaide (-0.2 per cent), Perth (-8.0 per cent) and Darwin (-13.3 per cent).
Despite the increase, Sydney and Melbourne’s performance still represents a slowdown year-on-year according to Cameron Kusher, CoreLogic RP Data’s research analyst.
“Although Sydney and Melbourne saw the largest ramp up in new housing supply, both cities still recorded rental increases over the year, although rental growth is slowing relative to 12 months earlier,” Mr Kusher said.
“The construction boom across the capital cities, coupled with slowing population growth, low mortgage rates and the recent heightened level of activity from investors are the major contributing factors to the slowing rental growth in 2015.”
Mr Kusher said it is clear that the increase in investment stock continues to provide landlords with little scope to lift rental rates while the low mortgage rate environment provides little incentive to push yields higher.
“We envisage that growth in rental rates is likely to remain weak or potentially slow even further over the coming months,” he said.
[Related: More bad news for property investors]
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