Tuesday, 10th of November 2020
There’s no question that 2020 has been a challenging year, and with the threat to public health and safety from the Coronavirus, we’ve seen huge economic impacts in many different industries – the property industry is no exception. Whilst buyer confidence is beginning to return to normality, the rental market is another matter entirely, with property experts labelling the current time as a Perth rental crisis for prospective tenants and a huge opportunity for investors.
How has this happened? What does this mean for investors? How can you take advantage of the current situation? And how will this affect tenants? We answer some of these questions below, whilst also looking at some forecasts, risks and opportunities in response to the current property market.
The Perth Vacancy Rate
For only the third time in 40 years, the Perth residential vacancy rate has dropped below 1%, bringing with it a series of challenges for tenants in the rental market. To be more specific, the current vacancy rate now sits at 0.96% which is its lowest level in 13 years, and according to the Real Estate Institute Of Western Australia (REIWA), Perth is on track to record an all-time low of 0.8%, which will eclipse the previous record set in March 2007.
On top of this, further figures from the June quarter have revealed a 27% reduction in the number of properties for lease, which is hovering around half the levels of stock in the market when compared with the previous year. A noticeable shortfall of availability, with tenants feeling the majority of pressure.
Why and How Has This Happened?
We originally forecasted 2020 was going to be “the year” for property investors to take advantage of a rising market, a prediction that, although true, has been held back by government intervention.
Since the outbreak of the Coronavirus (COVID-19) the property market had to adapt, and although Perth has navigated the pandemic particularly well, COVID-19 is at the very heart of the current rental crisis.
The WA Government, despite being on top of the pandemic, announced in September 2020 it would extend the emergency period tenancy legislation for all residential properties in WA until March 28, 2021. The "emergency" legislation restricts landlords' ability to price rents at market value and evict problematic tenants. The decision was intended to protect struggling tenants affected by COVID-19 and bring certainty to the rental market. In reality, the legislation has caused the market to tighten and thus become extremely competitive for prospective tenants.
Compounding this issue, the Perth property market has seen an influx of residents and expats returning from living interstate or internationally, bringing a flood of new demand to the market. Western Australia has also been a leader in COVID-19 response and a haven for residents to live without hefty restrictions, so it’s no wonder the local rental market has become more populated.
However, despite increased confidence in WA’s liveability, investor activity is down. Figures from REIWA have shown that the property market generally has around 30% of all properties purchased by investors, however the recent figures sit more around the 17% mark – leading to much lower levels of available market stock.
In our previous blog article, we talked about the apparent rental demand creating a boom time for investors in amidst these high levels of demand and shortages of availability. We uncover some opportunities that have come from the ongoing rental crisis below:
10-Year Housing Plan
Thanks to The WA Housing Strategy 2020-2030 there is a decade long plan in place to increase social housing by 6%, placing 150,000 Western Australians into homes. This is set to tackle the rental crisis head on by bringing new levels of stock to the market and helping to ease the burden of availability.
The Residential Tenancy Act
With the new residential tenancy act deadline firmly in the sights of investors, there will be new opportunities to push for increased rents once the extension expires on 28 March 2021. With the low levels of supply and high levels of demand in Perth's rental market it is predicted rents will rise by 20% or more. In fact, Perth landlords are already seeing rents increases between 10-20% on vacated properties according to REIWA.
The Building Bonus Scheme
Whilst it isn’t an immediate fix, the Building Bonus Scheme (announced in June 2020) is set to help introduce fresh stock to the market. The scheme provides eligible applicants with a $20,000 grant for new home builds. Eligible applicants need to have contracts signed by December 31st 2020 with construction previously needing to have commenced by June 2021. However, this deadline was recently extended to 31 December 2021 which is great news for investors looking to build and add to WA’s construction pipeline, and even better news for tenants wanting new places to live.
It is also a great opportunity to get in the market as a new investor or expand your current portfolio and maximise your returns when rents rise next year.
"It's a big commitment by the State Government towards this program, but it is ensuring that billions of dollars of housing constructions is undertaken, tradies are kept employed, businesses keep operating, apprentices (are) being engaged." - Mark McGowan (WA Premier).
Become an Investor or Expand your Portfolio
Get in the market! If you’re an existing investor or considering investing, this could be a great time to take advantage of Perth's current market conditions. In our Perth Market Update released in May, we discussed how Perth was the most affordable capital city in Australia to rent, with the percentage of family income required to pay median weekly rent sitting at 16.7%, compared to the national average of 23.6% (Source: REIA).
That means the market is already affordable AND rents will increase when the emergency legislation ends - great optics for any investor to take advantage of.
Until there is an increase in stock levels, the Perth rental crisis is expected to continually create challenges for tenants in search of properties to call home. It’s a matter of basic economics with demand significantly outweighing supply. The current market conditions have seen some properties receive over 100 applicants at home opens and creating high levels of competition in what this ABC article reported as a “landlord's market”.
Tenants have been offering to pay higher rental amounts than advertised, hoping to improve the value of their application to the top of the pile, even going as far as offering to pay a few months in advance just to get ahead of the competition. Figures from September 2020 showed properties being leased within 19 days on average, which is much higher than average, dating back to similar days on market as far back as June 2013.
The risks to tenants are opportunities for investors. A competitive market ultimately puts upward pressure on rents resulting in higher rental returns.
However, there is always a risk of a local COVID-19 outbreak which could not only create further heath and economical challenges but would also extend the emergency residential tenancy law beyond March 2021. If this occurs, investor confidence is likely to remain low as they lose the ability to make ‘free market decisions’ on their properties (i.e. increase rents and evict problematic tenants).
When asked about the risk of a further extension, a state government spokeswoman for Commerce Minister John Quigley made the point that the prohibition on rental increases only applies to properties under contract. She continued,
“Investors should not be discouraged to enter the market. Anyone who wants to take advantage of the low rental vacancy rates by purchasing a property for investment does not, under COVID tenancy laws, face any restriction on how much rent they charge. They can charge market rate.”
Forecasting the Road Ahead
With the vacancy rate at its lowest point in 13 years and further decreases predicted in 2021, it is looking likely that the Perth vacancy rate will hit an all-time low.
However, with the fate of the rental market firmly in the hands of investors, time will tell if there will be a surge in new market stock based on investor confidence returning to healthier levels. If the aforementioned opportunities come to fruition and new stock enters the market, this will certainly be a great opportunity for tenants to find a suitable property without the burden of applying against 100 other applicants. On top of this, it will also be a great occasion for investors to be pickier with who they choose for their properties, as well as a healthy time to push for higher rental yields.
We’ve already seen increased levels of investor activity with CoreLogic data showing Perth’s rental values increasing by 4.8% from January to September 2020 – significantly higher than the national average. On top of this, typical gross yields averaged 4.7% in September, up from 4.6% recorded last year.
Strategy Is Crucial
Whether or not you’re a tenant in need of future housing, or an investor with an established portfolio, a tailored strategy will be essential for navigating the uncertainty of the current Perth rental crisis. Whilst there are several factors at play which could change over time, aligning yourself with the right advice and guidance will prove crucial in keeping your head above water.
Here at Perth Property Management, we work with investors to created tailored strategies geared around finding the perfect tenant and maximising the returns of your property. We also work closely with tenants, helping to ensure they are being looked after in comfortable and well-maintained properties.
We have modern and dynamic systems that ensure we are always looking out for our clients, whether they be investors, landlords or tenants.
Are you in need of guidance or advice on navigating the Perth rental crisis? We welcome you to get in touch to see how we can be of service.