Industry Bodies Forecasting Rent Crisis in 2019
Remember the peak of the boom when renting a new house was virtually impossible? Rents were sky high (even for less than average properties), queues for home opens stretched out the door and people were bidding over the ‘asked for’ rent just to get a roof over their heads.
The latest data from REIWA shows rental vacancy rates dropping below 4% for the first time in a very long while. What is interesting about the graphs being peddled out by the industry body is the steepness of the recent drop. The graph is dropping like a stone, falling from a massive 7.3% just over a year ago! After years of rental gluts in WA we are finally seeing people take advantage of the cheap rents on offer (A median rent of only $345 per week at present) and moving out from their parental home or moving out of larger shared accommodation and getting some privacy at last.
Normally its at this very point that the investors are “up and about”. Existing property is cheap and land is readily available. Sub-dividable properties will never be better value than they are now and this type of land, if the price is right, is selling strongly already. In a normal market cycle these homes would already be sitting in a builder’s admin system, making its way through the council planning red tape and commencing in 2019. This would mean that as the rental vacancy rate drops further the much-needed new stock would be hitting the market in late 2019, cushioning the fall and putting a lid on rent increases due to falling numbers of available rentals. The market sorts it out in the end.
But hang on a minute, this cycle is different? Why? The banks and the Banking Royal Commission, that’s why. Investors heavily use interest only loans. They buy, build and sell immediately in many cases so a full mortgage repayment is incredibly bad for cash flow. They also need to be nimble, looking for opportunities to provide accommodation at the best price and have the project move quickly to its conclusion. Investors also traditionally have projects in various stages of completion. One project nearly complete, another piece of land just purchased and being demolished and sub-divided. The process needs banks to be flexible and supportive to make things happen.
This time around that’s just not happening. Interest only loans have been severely scaled back. Banks, running scared from the findings of the commission, are tightening up on credit applications and in many cases are just not lending what’s required. Research out this weekend showed that the ‘Big Four’ are losing market share to non-traditional lenders hand over fist. This is indicative of a wider problem.
It’s fair enough to take better care and prevent loans going to people who could get into trouble, but at the moment I feel the market has overreacted and good, solid investors can’t get funds. This will dry up new rental stock just when it’s needed the most.
With all the positive news about $70B of projects investment in WA, we need to be careful we are not causing ourselves a mighty problem at the end of next year. All the industry and government authorities are indicating this new mini boom is going to need extra people resources from inter-state. Where are they going to live?
As a local West Australian, the only way to beat the squeeze is to get on the front foot. Build a home now while the market is at decade lows. Prices are keen, land is available and build times are fast. And when you see rents rising you can sit back and watch your asset grow rather than the landlord's bank balance!