July 2021 Landlord Update

Tuesday 06 Jul 2021

STRONG GROWTH FOR RENTS, YIELDS COMPRESS

Rent values continue to see strong growth, though gross rental yields are compressing, according to CoreLogic.

In the year to June, Australian rent values increased 6.6%; the strongest annual appreciation in rents since February 2009. The highest annual growth in rent values was across Darwin, where rents have increased 21.8% across the dwelling market. This was followed by Perth (16.7%).

As with national home values, much of the increase in rental rates may be associated with government stimulus, increased household savings and a strong economic recovery from COVID restrictions. Rent value increases may also be a function of more subdued investor activity between late 2017 and mid-2020, and the resulting lower rental supply, as well as more demand deflecting towards rental markets in areas where home ownership has become less attainable due to affordability challenges.

Even the worst affected rental markets showed a more defined recovery trend through June. Across Sydney, unit rents were - 1.1% lower over the year to June. This is up from a recent trough in the annual growth rate of -5.7% in the year to December 2020. In Melbourne, the annual change in unit rent values was -6.4%, recovering slightly from year-on-year declines of -8.2% in the 12 months to March 2021.

Due to property value increases outpacing rents, gross rental yields have compressed further through June. Across the combined capital cities, gross rental yields hit a record low 3.1%, and combined regional Australia has also seen a fresh record low of 4.5%. ABS housing finance figures to April have shown a strong lift in investor financing since the start of the year, albeit off low levels. The return of investors to the Australian dwelling market may help to gradually ease rental conditions.

 

Remarkable turnaround

Overall, the housing market has shown a remarkable turnaround from initial expectations around COVID-19. However, the housing market has clearly lost some growth momentum. Persistently high housing value growth rates are 

proving unsustainable, from both an affordability perspective, and renewed headwinds amid a lockdown in Sydney and other parts of the country.

 

Headwinds forecast

Affordability constraints and the potential for tighter lending conditions and rising mortgage rates remain the primary headwinds for property market performance.

Even without recent developments of COVID-19 in Australia, it is clear that the housing market is losing momentum as affordability constraints build. More expensive credit, or credit that is harder to obtain, could further shift market dynamics.

Already through June, several of the major banks have forecast cash rate increases earlier than has previously been indicated by the RBA. A sooner-than-expected uplift in the cash rate would bring forward mortgage rate rises, and reduce demand for credit.

Furthermore, off the back of APRA writing to major lenders to ensure proactive risk management in home lending, there have been early signs of more conservative home loan assessments.

 

GROSS RENTAL YIELDS NATIONALLY

 

Sydney                                        2.6%                

Melbourne                                   2.8%                

Brisbane                                      4.1%                

Adelaide                                      4.2%                

Perth                                           4.3%                

Hobart                                         4.2%                                

Darwin                                         6.1%                

Canberra                                     4.2%                

National                                      3.4%

 

TAX TIME FOR INVESTORS

It’s a misconception that property managers are only there to find tenants, collect rent and organise repairs to your property.

They are also integral to the success of your investment. As far as the ATO is concerned, thorough and accurate record keeping is essential to the professional management of an investment property that is rented out to a tenant. A rental property comes under the same scrutiny as a business would – all income and expenses should be declared, and records kept ensuring the property is being run in compliance with the ATO’s requirements. The property manager is responsible for collecting rent and issuing receipts for it, as well as maintain records and receipts for all expenses incurred in the maintenance and running of the property. In addition to that, rental providers should consider long term projects for their investment and an annual Tax Depreciation Schedule is a great way of doing this.   

BMT Tax depreciation is a Performance Partner of First National Real Estate, offering services that help investors maximise the cash return from their investment property. Key to their offering is the Tax Depreciation Schedule – a report that details the depreciation that can be claimed on all aspects of the property for the current year, and projections for the same for up to 4 decades ahead. A Tax Depreciation Schedule is an essential component of your EOFY reporting and should be done before your return is submitted to the ATO. 

 

5 QUESTIONS THAT RENTERS COMMONLY ASK US

Property managers always have a lot of questions for tenants when they apply for a property, but sometimes the tenants have questions too, and not just when applying for a property. Here’s a selection of questions that tenants commonly ask that may not always have the most obvious answers:

 

1. Who is my landlord?

This is not always easy to answer, especially if the landlord (now known as a ‘rental provider’ wants to remain anonymous or lives next door for example. Of course, tenants see the l rental provider’s name on their lease, but property managers are under no obligation to give them any more information than that. Keeping boundaries between the rental provider and the tenant is one of the main reasons to have a property manager after all.  

 

2. I can’t pay my rent this month - can I have an extension?

Each agency has their own processes around rent collection and arrears – some specific to the type of software they use, and others as a developed policy by the agency. Detail of this is usually provided at the time the lease is signed so responses to tenants’ requests for later payments will always comply with this. In times of hardship (such as unemployment, illness or bereavement) a compassionate approach should be taken, and arrangements made where possible that will support the tenant, but without too much detriment to the rental provider. Good communication in these instances is essential.

 

3. Can I get a pet?

Though their original lease may have stated no pets allowed, tenants can request to amend this over time. This has been particularly relevant in recent years with some states changing legislation in the tenants favour around being able to keep pets. The rental provider may be adamant they don’t want pets in their property, but if the state laws say otherwise, the choice may be out of their hands.

 

4. Why has my rent gone up?

Many tenants don’t factor ongoing rent increases into their decision when signing their initial 12-month lease.

Managing expectations as they renew each time and in advance of rent increases helps gradually train them to expect and manage the increased expense. 

 

5. Can I hang pictures?

Similarly, legislation has changed around tenants hammering things into walls too. Where previously permission from the rental provider was required, now there is more leeway in favour of the tenant, so check your state’s tenancy laws for updates. There has been a shift in recent years to allow tenants more freedoms to make properties feel more like home – the freedom to choose to have pets and pictures being the first step.