Investors Beware: Property and Rental Prices Are Falling

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Property investors are facing a tricky couple of months.

Last week, we saw early signs Australia’s property market was starting to cool. Dwelling price growth in July plunged to a modest 0.3%. Now we’re seeing pressure coming from the other side too.

According to new CoreLogic RP data, rental yields are growing at the slowest rate in 20 years. Rents fell again in August on the back of rising housing supply and slow population growth.

The only city where rents remained untouched was Sydney. Every other major capital saw falls in rental growth. The monthly average fall rose to 0.4%, up from 0.3% in July.

Year on year (YOY), rental growth dropped to 0.7% in August. That was down from YOY growth of 0.9% in July.

Two factors were at fault for falling rental growth. CoreLogic explains:

The reasons behind this lacklustre result for the rental market can be attributed to the extent of the current construction boom across the capital cities and slowing population growth’.

This housing boom was led by new building approvals, which rose 4.2% in July.

But there was pressure on rents coming from another familiar source too. Rising investor participation was a further drag on rental yields.

Added to this is the surge in investor participation in the housing market, which is contributing to weaker rental growth by adding to the rental stock’.

It all adds up to a depressed rental market.

Rents have been falling in most capitals for several months. The only exceptions to this rule were Sydney and Melbourne. Now Melbourne has also joined the ranks of those seeing rental growth decline. Only Sydney still sees stable YOY yield growth.

That might not last long though.

Rental yields to continue falling

CoreLogic says that rental rates will fall further over the coming months. It expects that capital growth will outstrip rental growth. That seems the likeliest outcome.

Rental yields are already growing at their slowest rate on record. A rebound seems unlikely considering higher supply and rising construction. Rising investment levels will maintain pressure on rents.

The outcome of all this is that renters will have a lot of choice at their disposal. And choice means only thing: lower rents.

All this adds new dimensions to the investor property market.

Negative gearing, for one, becomes a much bigger priority for investors. Covering mortgage payments with rents may not cut it for many investors. That’s even truer if rental growth declines further.

For investors, that puts the focus back on house and unit price growth. More investors will be left relying on negative gearing to make investments profitable.

Is negative gearing as viable as it once was?

Negative gearing could be a problem in the long run. Why? Because there are clear signs now that house price growth is stalling.

Sydney house prices rose 1.1% during August. That was down 3.3% on the previous month. Melbourne’s prices didn’t grow at all during the month.

Elsewhere, prices in Adelaide grew 0.7% in August. Darwin was the only other city that saw an increase, with prices rising 0.3%.

It was a different story elsewhere. Perth plunged yet again, down 1.3% for the month. In Canberra prices declined 1.7%. And Hobart saw a 1.1% drop too.

On the whole, the Australian housing market grew at 0.3% in August. It was the worst monthly performance in recent memory. And it was a sharp drop on previous months. Across June and July, combined city dwellings rose 5.3% in value.

If prices show another slump next month, investors may start to get nervous.

Housing supply is up, price growth is slowing, and rents are falling. That’s good news for renters, and first time home buyers. Rental and housing affordability will improve should this persist.

For investors, however, it’s the worst possible combination.

Mat Spasic,

Contributor, The Daily Reckoning

PS: The Daily Reckoning’s property expert, Phillip J. Anderson, doesn’t take much note of last month’s weak house price growth. He’s said all year that house prices are set to boom over the next decade. That should lift your spirits if you’re an investor looking at falling rental yields and house prices.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

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