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What the rental market tells us about property prices

What is going to happen next to Australia’s troubled housing market?

Will the whole country keep crashing? There is a difference in the housing crashes around Australia, hidden beneath the headlines, that might provide a clue.

You’re familiar with the price falls — Australia’s capital city average house price is down around 7 per cent.

The total fall is much worse in Perth (down 18 per cent from the peak), and has been especially sharp in Sydney, where prices are down 14 per cent.

Melbourne is not far behind, down 10 per cent.

Adelaide and Brisbane are fairly steady while Hobart is up, its peak is right now.

Regional Australia is down 2.5 per cent, especially regional WA, where home prices are down 32 per cent.

But there’s another way to look at the housing market. Renters. And the renting numbers tell a fascinating story.

In Melbourne, while house prices fall, rental vacancy rates are falling.

It’s easy to find a tenant and rents are rising.

That suggests there is continuing strong demand for housing.

There may, it seems, be a limit to falling prices in Melbourne.

But in Sydney rental vacancy rates are going up. That does make sense, with house prices falling so fast.

Both of those facts suggest people don’t want Sydney housing so much any more.

Demand for housing is Sydney is weak no matter how you look at it

You can see the rental vacancy rates in Sydney and Melbourne in the graphic below, as well as the rental vacancy rates in several other markets.

Rental vacancy rates in Sydney and Melbourne as well as the rental vacancy rates in several other markets.

Renting numbers offer an insight into the real estate market. Source: RBA Statement on Monetary Policy February 2019

Overall, the income Australian landlords are getting from rental properties is growing more slowly. Advertised rents are getting more expensive in Melbourne, but cheaper in Sydney.

Understanding the strength of the rental market is important for seeing the future of the housing market.

Sydney, Melbourne and Brisbane are all set to have a large number of apartments released onto the market in the next few years.

Many tall towers that had their foundations concreted in the boom time will get their final coat of paint amid the bust. Such is the cyclic nature of property development — by trying to meet peak demand, they create an oversupply that fuels the bust. What looks like a rational course of action for one developer might not be rational if every developer does the same thing at once.

Releasing those newly-built properties onto the market could have negative effects on both property prices and rents. The big question is: Who will live in all those properties?

In Melbourne, that question is not such a concern. With vacancy rates falling and strong population growth, there is apparently a willing market for those new homes.

The difference between population growth rates in Australia’s major cities is notable.

The lowest growth is in Adelaide, where its at 0.8 per cent per year and the fastest is Melbourne, which is growing at a very rapid 2.5 per cent a year.

But in Sydney and Brisbane?

The risk is a flood of new properties will struggle to find anyone to live in them — whether owner-occupier or tenant. That would push prices down further.

This is especially the case for the many Sydney apartments being built in the outer suburbs where apartments have not traditionally been built.

What the rental market tells us about property prices

Apartment buildings started during the boom are now coming onto the market. Picture: AAP Image/Brendan Esposito


The future of Australia’s rental market is also affected by the future of negative gearing.

But this is less about demand for rental housing, and much more about supply of it.

Negative gearing is a tax rule that allows owners of investment properties to deduct any losses they make from their total taxable income.

If for example they have a $2000 shortfall between the rent they collect and their total costs of ownership, they can subtract that from their salary or wage income.

In our example, their taxable income would then be $2000 lower.

For a person paying 45 per cent tax on the marginal dollar of income, that would save them $900 a year.

In this way, negative gearing makes losing money on owning a rental property less painful, and operates as a kind of subsidy that encourages people to invest in property.

The Labor Party is promising to get rid of negative gearing for buyers of existing property starting on January 1 next year.

If they win the election and change the law, this could cause interesting changes in the property market. It is likely fewer investors will want to buy existing homes any more. That should mean existing homes slowly move out of the hands of investors and into the hands of owner-occupiers.

If fewer rental properties are available, rents might go up. But at the same time, with fewer investors trying to buy investment properties, the price of buying an existing home might come down.

It could be a great time for a renter to become a first home buyer.

This article first appeared in Here is the link to the original article.

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