If you read a lot of property stories in the media or surf investor blogs or websites, it’s not long before you’ll find someone complaining about the Victorian government making life difficult for landlords.
A new land tax regime, minimum rental property standards legislation, and policies that are seen as overly tenant-friendly have caused many investors to sell up in Victoria.
“This is predominantly due to its plethora of anti-investor rental reforms, as well its new land tax regime that is set to cost investors billions of dollars over the years ahead,” says Nicola McDougall, the Chair of Property Investment Professionals of Australia or PIPA.
PIPA represents hundreds of people working in the property investment space, including advisers, financial planners, mortgage brokers, real estate agents and tax specialists.
Not surprisingly, the group’s recent annual investor sentiment survey found Victoria was regarded as the “least accommodating” state or territory for property investors in the nation, with 21.7% of survey respondents indicating they had sold at least one dwelling in Melbourne in the last year.
Rentals plummet
Now it appears that negative sentiment by investors has come home to roost.
New data from the Victorian government’s Department of Families, Fairness and Housing shows the state has just experienced its sharpest fall in rental stock since record-keeping began in 1999.
The number of active rental bonds held in trust by the state fell last financial year from around 676,400 to 654,700 this year.
In other words, there were 21,700 fewer long-term rental properties in the market.
The ABC also reported that “the speed of rental stock loss also appeared to be increasing, with the total number of rental bonds dropping 1.3% in the three months to May, and 3.2% in the three months to June.”
Another investor lobby group, the Property Investors Council of Australia, says the falling rental bond numbers should sound an “alarm signal” for the Victorian government.
“Investors are basically voting with their feet and their wallets, and they are tapping out," says PICA chair Ben Kingsley.
"If we continue to see 2-3% of the current stock leaving the market, we are talking tens of thousands of rental properties leaving the market.”
Consequences
So what’s the effect of removing thousands of rental properties in a state that is home to the biggest city in the country - Melbourne - and which has the second highest population growth rate of any state and territory?
New figures from Domain show that the overwhelming majority of suburban markets in Melbourne have recorded rent increases in the last 12 months, with only four seeing falls in asking rents and just five seeing no change.
The top markets for growth were Bellfield in the inner north-east, which saw house rents soar by just under 34% to $643 a week, while units in bayside Aspendale saw asking rents jump by 24% to $608 a week.
According to Domain, only units in Ivanhoe East and house markets in Caulfield, Parkville and Sorrento saw rental price drops over the year until the end of September.
Tim Lawless, the Research Director at CoreLogic, thinks the falling rental bond figures are “significant and surprising”, but says the situation could be a lot worse.
He notes that CoreLogic figures show rent growth has slowed in Melbourne in the last three months to 0.2% for houses and 0.5% for units.
Mr Lawless believes falls in net overseas migration to Australia, increases in the average household size, and Victoria’s nation-leading home building completion rate are helping to keep a lid on rents.
PIPA’s annual investor sentiment survey also indicated that about 2/3rds of investment properties sold around the nation in the last year were snapped up by first-home buyers or upgrading or downsizing owner-occupiers, meaning the investor exodus has been a boon for cashed-up renters who want to buy.
However, I’d suggest the number of renters who have saved a large deposit and secured the finance to move into property ownership is limited.
The take-out
It’s clear that a lot of negative sentiment and talk about Victoria, combined with high interest rates and increased holding costs, has led many investors to sell up in the state.
However, now there’s a supply shortfall which is seeing rents in Melbourne continue to grow—albeit more slowly, many might come to rue the day they decided to sell up in Victoria.
While PIPA’s recent investor sentiment survey showed many were angry at the way they thought they’d been treated by the Victorian state government, it also clearly demonstrated that savvy investors recognise that Melbourne offers excellent future capital growth.
26.2% of survey respondents say it’s the best place to invest in Australia right now, ahead of Perth (25.1%) and Brisbane (17.8%).
The reasons why investors believe these locations are the best to invest in right now were good long-term capital growth prospects (57.5%), followed by good population growth (52.6%) and being a major capital city (47.9%).
Research at Freedom Property Investors shows that over the long term, Melbourne’s median home price generally tracks at around 78% of the Sydney median.
However, a period of muted price growth (city-wide price growth has been only around 10% over the past four and a half years) has seen that gap blow out, with Melbourne now tracking at about 65% of the Sydney median dwelling price.
We believe that means Melbourne property prices—on average—are about 12% undervalued compared to the city’s long-term fundamentals.
And it’s not just us here at Freedom….
Terry Ryder, the Founder of high-profile property analysts Hotspotting, says he would prefer to invest now in Melbourne rather than in booming Perth.
“We look at the underlying factors, which are forward indicators of price growth; incredibly strong economy, the strongest population growth anywhere in Australia, based on the latest figures from the ABS,... a big uplift in sales activity recently,” he says.
“So, everything's building for the Melbourne market,” Ryder says.