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Increased mortgage repayments and declining housing finance have made conditions less favourable for investors, despite increased rents, a new report has revealed.
According to the ANZ CoreLogic Housing Affordability Report titled, “Reflections on the Pandemic and the Rental Market”, rental affordability — being the portion of income required to service a new lease — has reached its highest level since June 2014, with 30.8 per cent of income required to service a new lease nationally, for a median income household.
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The report highlighted the impact of increased rental demand and regional migration during the pandemic on rental values and vacancy rates.
Since March 2020, rent values increased by 28.8 per cent in regional communities and 24.4 per cent in the capital.
However, despite the rise in rents, the combined value of housing finance lent to investors has experienced a significant decline, dropping 30.0 per cent from its peak in January 2022, suggesting a slower rate of new rental supply being added to the market at a time when rental demand runs hot.
ANZ senior economist Felicity Emmett said it’s important to factor in rental metrics when looking at housing affordability in Australia.
“Heightened economic uncertainty has seen a decline in sales volumes in the private market and an increase in those seeking rental accommodation,” Ms Emmett said.
For example, the rental vacancy rates across Australia were at 1.1 per cent (April 2023) well below the decade average of 3.0 per cent, at the same time, the number of listings dropped by 38.1 per cent from the previous decade’s average.
Furthermore, the report revealed that while weekly rents have increased by an estimated $115 per week until April, mortgage payments have surged by $318 p/w.
As such, these increased costs have made investment conditions 'less favourable' for potential investors in the rental market.
Historically, tax incentives such as negative gearing and capital gains discounts on investment properties have allowed individual investors to make a loss on rental properties while benefiting from after-tax capital gains.
However, analysis of resales of investment properties in Australia in the December quarter of 2022 “revealed a median nominal gain of $166,000”, suggesting that capital gains are likely the primary driver for individual investment property decisions in Australia, rather than rental income.
In addition, there are indications of a potential mild lift in investor interest in the property market if there is no further increase to the cash rate.
March housing finance data from the Australian Bureau of Statistics (ABS) showed a 3.7 per cent increase in the combined value of secured investment housing finance, coinciding with speculation that interest rate rises were nearing a peak.
Construction bottlenecks
The report also highlighted the impact of reduced rental supply on construction bottlenecks.
The higher inflation and interest rate environment have caused delays in construction and a decrease in demand for new investment properties. This has further exacerbated the undersupply of rental accommodation.
There is likely to be more of a demand response from tenants themselves as the rate of new rental supply slows.
Thus, the year ahead may see “greater formation of share houses”, the report noted.
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