Rents on the rise

After years of strong capital growth in most of our capital cities, it’s clear that 2011 will be a different year – one of minimal growth.

The trouble is that there are now more properties for sale than there are buyers.

Affordability has become an issue for many potential buyers, who are feeling the pinch of many interest rate hikes last year. At the same time there is less consumer confidence as a result of the mixed messages in the media, and this means many would-be home buyers and investors are sitting on the sidelines waiting to see what will happen.

What these observers of the property markets will notice is that rents are going to rise significantly over the next few years.

Why?

Our population is still growing in our major cities, and people have to live somewhere. If they can’t afford to buy they’ll rent, and we’re just not building enough new dwellings to accommodate them all.

This leads to the question – can all these tenants afford the rent hike many landlords would like to impose?

 There’s some encouraging news from leading property researcher Michael Matusik, whose 2011 rental market survey found the majority of tenants are willing to pay more in rent and have the ability to do so.

 The survey found that although seven out of 10 tenants want to buy their own property, and just over half anticipate doing so within the next 12 months, most want to stay in their current accommodation and are willing to pay more rent rather than move.

 Two-thirds of the renters surveyed said they were prepared to pay 5% more in rent, and a further 30% said they would accept an even bigger rent increase in order not to have to move.

 Even better news for property investors is that the majority of tenants can afford to pay more. Three-quarters of the respondents reported that they were paying less than a third of their income in rent and half were paying less than a quarter of their pay on accommodation.

 With vacancy rates well below the long-term average, rising demand for rental accommodation and a shortage of new accommodation, rents are likely to start rising again. This will be welcomed by property investors, as most experienced only sluggish income growth over the past year.

According to RP Data capital city rental growth for the 12 months to March 31 was:

• Sydney +5.3%
• Hobart +4.5%
• Perth +4.4%
• Darwin +3.7%
• Adelaide +2.8%
• Canberra +2.5%
• Melbourne +0.9%
• Brisbane -1.0%

Just to make things clear – what we are experiencing is the property cycle running its normal course.

At times when properties are affordable and buyers are out in force pushing up prices, rents tend to lag behind. Then in the current stage of the cycle, when price growth stagnates because there are fewer buyers and more tenants in the market, it is the time when rents catch up.

That’s just how the property cycle works.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.