2019 saw a relatively flat property market. Prices were quite stagnant due to many factors, one being the uncertainty surrounding the federal election and what would happen to negative gearing as a result. Another major factor could have been the natural property cycle. Melbourne has had 4-5 years of strong, consistent growth in property values, so deceleration was inevitable.
But no one expected what would be one of the major global events of our lifetime: Covid-19.
No one could have predicted this as it is the sort of externality that macroeconomics can’t really account for. We’re in unprecedented times and it’s difficult to predict what is around the corner.
Many investors want to know how this will affect their properties and potential investors want to know if it is a good time to get into the market.
Although nothing is for certain, there are a few general trends that you should be aware of if you’re considering a rental property as an investment, or you already have one:
Market Snapshot – May 2020
The proportion of vacant properties have increased again for metro Melbourne (2.8 per cent), while regional Victoria remained stable as its vacancy rate only rose slightly to 2.0 per cent.
The weekly median rent for houses in metropolitan Melbourne fell to $455, while the weekly median rent for houses remained at $350 in regional Victoria.
Weekly Median Rent (Houses)
Vacancy rate has increased again for Metro Melbourne (2.8%) which brings the average statewide to 2.7%
Inner Melbourne saw the biggest increase to 2.9% over the month.
Median rents also fell in Metro Melbourne for house ($10 to $455 pw) and unit ($15 to $400 pw).
Regional Victoria remained stable as its vacancy rate only rose slightly to 2.0% and median house rents staying at $350 pw for 5 consecutive months.
Data sourced from the REIV.
Undersupply of tenants
Given that many people have lost their jobs or have had their working hours reduced, people are generally less inclined to move around. This can make leasing tougher as the pool of potential applicants is reduced.
If your property is already tenanted, you should do everything you can to keep your tenants in the property, even reducing their rent slightly if they want to leave. If your property is vacant, then make sure you have a property manager who is adaptive and able to alter their strategy to reflect the tougher leasing conditions.
Oversupply of rentals
Because the amount of properties being leased is lower than usual, there are more vacant properties on the market. This means that the tenants who are looking for a place have a greater selection to choose from. This can be concerning for landlords as it likely means that their property will be vacant for longer than normal, and they’ll have to do things like reducing their rent and paying for more prominent advertising to generate interest in their property.
Reduction in rents
Because of the undersupply of tenants and oversupply of rental properties, rents have been reduced across the board. This is the reality of leasing in a tough market. One of the most effective things a property manager can do to generate interest and gather enquires is to drop the rent to make the property more attractive.
This is not the news that landlords want to hear but at the end of the day, it’s the basic economics of supply and demand. Many landlords who refuse to lower their rents are finding that their property is staying vacant for longer. We have gotten used to a booming property market where rents have been adjusted upward every year or so, but we forget that downward adjustments are necessary in times of economic crisis.
Melbourne is the fastest growing city in Australia and was expected to over take Sydney in the next 5-10 years. 2019 saw the continuation of strong population growth which is good for the property market.
But our borders have been shut for the foreseeable future and population growth has been reduced. No one knows when the borders will be reopened, or if there will be any change to immigration policy as a result of Covid-19.
This can be good for homebuyers of properties because the competition will be somewhat reduced. The issue for investors however is facing the reduction in the amount of new renters entering the market. This makes leasing harder as outlined above and likely means that the construction of new properties will slow down (however marginally).
What to do in these uncertain times
Predicting what the property market will we look like in the future is difficult at the best of times, and under the current circumstances, impossible. But there are certain principles which should save you from the worst of the fallout:
Compromise with your tenant.
Now is not the time to play hardball with your tenant. Keeping them in the property, even at a reduced rent, is in your best interests as finding a new tenant will be tough and you’ll likely have to drop the rent anyway. If they have lost their job, negotiate a temporary lease agreement which reduces their rent for three months. A 30% reduction for 3 months is the most common solution that many landlords and tenants are agreeing to.
Freeze your mortgage.
Many landlords themselves have lost their jobs and are experiencing financial difficulty. If this is the case, call up your bank and put forward that you are experiencing financial hardship. Banks are allowing their clients to freeze their mortgage repayment for up to 6 months. Although the interest will accrue and you’ll have to pay this eventually, having your monthly repayments deferred will allow you to breath a little easier and protect yourself if your monthly income from rent stops or is reduced.
Buy if you can afford it
If you have retained your job or have some cash to back yourself, now can be a good time to buy a property at a discount, especially during a recession. Just be aware that you probably won’t get the same rent you would have gotten two months ago. Check the rental market to get an idea of how much you could realistically ask on a weekly basis. If you decide to go ahead, price your property near the bottom of the comparable properties to generate strong interest.
Get yourself a good property manager
If you have never seen the need for a property manager, now is the time to consider one. A good property manager can be the difference between thousands of dollars of lost rent, and a relatively smooth sail through these tumultuous times. Property managers have successfully negotiated compromises between landlords and tenants which is ultimately beneficial for both parties in the long term. If you lose your tenant in a time like this, your property might stay vacant for weeks or months if you’re not careful.