It’s taken a global pandemic, a topsy-turvy economy and Russia invading Ukraine but Australian property prices are finally starting to fall – yet rent is going in the opposite direction, and this is just the tip of the iceberg…
To keep a lid on inflation, the Reserve Bank of Australia has increased interest rates for the fourth month in a row – after keeping rates flat at a record low 0.1% since November 2020. While this hasn’t had the instantaneous effect on property prices that many had hoped, we’re now starting to see prices fall across the country (from record highs, mind).
You’d think that this would mean rent would start to fall too. But it isn’t. Quite the opposite, in fact. House prices might be dropping at their fastest pace since the 2008 global financial crisis – with notoriously expensive Sydney seeing the sharpest value falls in over four decades among Australian capitals – rents are going up at a historically rapid clip, ABC News reports.
It’s terrible news for renters, especially considering how much the cost of living has risen in recent months. Supermarket trips have never been more expensive. Why is this happening? Essentially, higher interest rates mean larger mortgage payments, which landlords are passing on to their tenants – an unfortunate but predictable result of how overleveraged many property investors are.
But if that wasn’t already bad news, things are about to get even worse, especially as we head into summer and our borders continue to open post-COVID.
Firstly, as international students return to Australia in their thousands, they’ll be looking for rentals, further exacerbating the rental crisis. While their return will certainly benefit the Australian economy in other ways – over 600,000 international students studied in Australia in 2020, worth $37.6 billion to our educational sector alone – but it won’t help Aussies looking for affordable rental properties.
Secondly, as both the domestic and international tourism sectors get back up to speed, more and more properties are likely to move out of the rental sector to Airbnb and the tourism sector, further driving up rent.
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Let’s take the Gold Coast as an example. According to Real Estate Investar, the median rent for houses on the Gold Coast is $650 per week and the average rental yield is around 4-5% (not fantastic). In comparison, short-term rentals on the Gold Coast on Airbnb and Vrbo average $3290 in monthly revenue, according to Airdna.
Sure, you’re comparing a 99% occupancy rate for a traditional rental versus 61% for an Airbnb (a pretty killer occupancy rate, actually) – but as a landlord, you’ll make more money doing short-term rentals. Yes, that’s bad for people looking for a place to live, but that’s cold, hard economics.
What’s the solution? Well, things might be grim for the next 12 months but eventually, landlords will get too greedy, Aussie renters will hit a price ceiling and things will settle down. That’s the theory, at least. What really needs to happen is for house prices to keep falling for an extended period, while interest rates stay low.
The more brutal answer is that a lot of people who probably shouldn’t have been property investors won’t be able to service their mortgages and properties will foreclose… And a lot of average Aussies who are looking for a place to rent will need to make some serious sacrifices.
Save your avocado on toast jokes.
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