Many experts and analysts are worried about the apparent oversupply of units in Sydney and Melbourne, but John Lindeman predicts that we are actually heading for an acute shortage of unit rental stock in those cities.
The number of overseas investor property purchases in Sydney and Melbourne is declining because of tighter restrictions imposed by the Federal Government through the Foreign Investment Review Board, increased Stamp Duty and other penalties imposed by both the State and Federal Governments and because price growth has ended.
At the same time, local investors are being slugged by tighter APRA enforced restrictions on the banks’ lending to investors. Not only are many aspiring property investors being refused housing finance, but existing property investors are finding that the new lending qualifications will reduce their capacity to maintain their existing portfolios.
The net effect of all of this is that the number of investor owned properties in Sydney and Melbourne is likely to fall over the next few years rather than increase, and this means less rental stock available to renters.
At the same time, aspiring first home buyers simply can’t raise the deposit required to purchase their first home in Sydney or Melbourne and even if they could they can’t afford the repayments. Their choices are to move elsewhere, which means uprooting from friends, family and work, or renting and hoping for something to change.
Not only are the ranks of frustrated aspirational first home buyers growing, they are being joined by overseas arrivals, virtually all of whom have to rent for years before they are settled enough in their new country to think about buying a home of their own.
We are in the middle of a population boom, mostly from overseas arrivals heading to our two biggest cities, Sydney and Melbourne. The graph above shows that according to the ABS, over half of Melbourne’s annual population growth comes from permanent overseas arrivals and over two thirds of Sydney’s new residents also come from overseas as migrants. Because of the relatively high price of first homes in Sydney and Melbourne and their unaffordability in terms of deposits and repayments, these new residents will have to wait many years before they can stop being renters and become home buyers.
Those who forget the past are likely to relive it. The future direction of housing markets in Sydney and Melbourne could be very similar to what occurred to prices and rents in these cities during the last population boom – the post war boom.
With the war over, cashed up soldiers, sailors and airmen returned home, finally able to start families. Finance was easily obtained through government initiatives such as War Service Home Loans. Due to the escalating demand, house prices doubled in just three years from 1948 to 1951 as the graph shows but once all the retuned servicemen had bought homes, buyer demand slowed down and prices did not rise for the next eight years.
Then from 1950 onwards, rent demand started rising rapidly. The rental yield climbed from just 2.4% in 1950 peaking at 11.5% in 1959, with weekly rents
five times greater than they had been in 1950.
The cause of this massive increase in rents was demand for accommodation from the huge numbers of overseas arrivals now pouring into our larger capital cities. These new residents were forced to rent for years until they were sufficiently established to be able to buy their own homes. This led to massive housing shortages for rentals, but not purchases.
This historical situation is very similar to today’s housing market in Sydney and Melbourne, where rapidly rising house prices are now likely to be followed by a huge rise in rental demand from overseas arrivals. They will be joined by frustrated first home buyers who have been priced out of the market and if the post-war experience is anything to go by, renters could be faced with some massive rises over the next few years. Good news for property investors seeking high cash flow, but bad news for aspiring first home buyers.