Rentals spur housing recovery

Written on the 30 November -1 by Michael Matusik

A 1960's-styled housing recovery is expected in 2007 and beyond due
to changing demographics, changes to superannuation and most importantly, the tight rental market, according to independent property analyst Michael Matusik.

A leading property commentator, Mr Matusik, the director of Matusik Property Insights, says interest rates are also likely to remain steady in the next decade or so.

He says since the early 1970s, residential market recoveries have been driven by a decline in interest rates. The exception to this rule was during the 1960s, when an undersupply of existing housing stock, coupled with rising demand - that time fuelled by high levels of overseas migration to Australia - saw new housing starts increase despite rising interest rates.

"High petrol prices and China and India's maturing economies are likely to keep inflation pressure on the Australian consumer price index. Petrol's impact is somewhat straightforward," he says.

"Wage growth in China has exceeded productivity gains in the past three years and - as has happened in other developing economies - its workforce wages are higher and will continue to rise. The days of cheap imports are coming to an end, which will have a negative impact on Australia's quarterly inflation results.

"So, we are likely to see a rental-led recovery, rather than an interest rate one.

"When vacancy rates fall below two per cent, rents rise sharply. The only exception to this was during the late 1990s, when limited demand saw a quick correction to the rental undersupply.

"Rents, in real terms, have increased by more than $100 per week during the past five years across south-east Queensland, which compares well to the mere $10 rise during the entire 1990s. Real rents increased $50 per week during a three-year period in the late 1980s, when the vacancy rate was close to one per cent. Last year, rental growth across all of the Australian capital cities exceeded their 10-year average gains.

"In summary, rents are rising, the rate of growth is escalating and it is no surprise that investors (long-term holders and not speculators) are back in the market.

"Current building levels across both NSW and Queensland - which are both affected by limited land supply - are well below the anticipated underlying demand for the next five years. Interestingly, sales levels across Western Australia look like they cannot be sustained, as they exceed forecasted underlying demand between 2006 and 2011.

"Overall, there is a need for 110,000 new, detached houses per annum across Australia in the next five years.

"When looking at the major states by themselves, we find that South Australia and Western Australia are projected to be in oversupply by 2008. Meanwhile, the new housing supply situation is likely to deteriorate in NSW, Victoria, Queensland and Tasmania. NSW is likely to see the biggest shift into undersupply.

"Firstly, don't just chase a rental return. Using south-east Queensland as an example and looking back over the past 20 years, the total investment return (including both capital gains and net rental returns) was 15.6 per cent annually for a three-bedroom house and 13.2 per cent for a two-bedroom apartment. But the net rental component of this total return was only 5.7 per cent (or 37 per cent) for the detached house and 5.6 per cent (or 40 per cent) for the apartment.

"On average, 41 per cent of the total long-term investment performance of a detached house across urban Australia can be attributed to net rental returns. Today, given the limited capital growth, established house prices grew by 3.6 per cent, on average, across the eight capital cities in the past 12 months.

ÄNet rental growth makes up 95 per cent of the current (past 12 months) total investment return (8.7 per cent) for a detached house in south-east Queensland and nearly all of the total return (14.7 per cent) for a two-bedroom apartment.

"Following on from this information, treat the booming west and country towns with caution. A softening of the commodities boom (keep in mind that 22 per cent of the Western Australian economy is dependent on mining; compared to just eight per cent in Queensland) and declining housing affordability could hurt the Perth market. This applies to the Queensland mining-based towns too.

"Secondly, when buying an investment property, make sure it can be rented out in a share situation. Five years ago, 31 per cent of families rented across Australia. This has now increased to 42 per cent. Lone persons are steady at around 31 per cent, as is the proportion of couples (with no kids) renting.

"In contrast to families, the proportion of share/group households renting has dropped from 24 per cent in 1999 to 10 percent in 2004. This was because rents were relatively cheap during this period. Why share if you can afford not to?

"But we believe this will change. There is, just like in the owner market, a limit
to rental affordability and with more than half of renters aged less than 34 years,
we believe that many renters are already close to this limit. Rents should continue to rise, but tenants will increasingly opt to share accommodation.

"A recent ABS study found that around two-fifths of private rental households say they have at least one spare bedroom, with a further 20 per cent of renters stating that they have two or more spare bedrooms.

"So, in conclusion, buying a two-bedroom/two-bathroom apartment to rent out, for example, is often better than a two-bedroom/one-bathroom configuration.

"In summary, more tenants will be forced to share. A Sydney-started recovery is likely to see a higher rate of migration to Queensland as more people from NSW move north to more relatively affordable housing.

 


Author: Michael Matusik

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