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FOR OPTIMUM RESULTS IN PROPERTY DEMAND GREATER THAN SUPPLY WILL KEEP PRICES AND RENTALS GOING IN THE RIGHT DIRECTION.
What is happening in the market place right now makes it a great time for people to get into the property market.
There is a reluctance from developers to build today which is really due to the slowing down of buyers, probably as a result of the interest rate rises plus the tightening of credit, an indirect result from the sub prime situation in the USA.
However, the fact that there are fewer buyers, really isn’t a cause for alarm as there is less properties being developed causing a shortage of rental properties.
Adding to the disincentive to build are the ongoing rises in the cost of construction materials and shortage of labour country wide.
At the same time Australian population growth is increasing at a rapid pace. Last year the nation’s population grew by around 330,000 new residents with both overseas migration and the level of natural increase at historic highs. Illustrating the surge in numbers, during 2006 the nations population increased by 304,700 and in 2005 new Australian residents increased by 292,000.
The net results of these two factors: low levels of housing construction and strong population growth, are at odds with each other. At the base level we are seeing demand for housing far outstripping supply, and the situation is worsening.
Over the year ending June-08 approximately 157,000 new dwellings commenced construction; well below the 200,000 dwellings estimated to be required by the Commonwealth Treasury. In fact, this is around 43,000 too few dwellings being built over the year. Compounding the undersupply is the fact that this scenario has been played out over the last couple of years and is likely to continue into the future.
There are two factors flowing from this supply/demand imbalance. Firstly, the undersupply of dwellings places a natural floor under housing prices. This is the fundamental reason why property values have not fallen further in Australia’s major residential markets. A factor which is not the case in the USA with the financial crisis they have and therefore Australia can not be placed at the same level of concern relevant to USA.
Secondly, the pressure is building on the rental market. Vacancy rates are averaging less than 2% across the nation’s capital cities and rental rates for houses have increased by almost 11% over the last year. We should expect to see rises of a similar magnitude over the coming year.
Sydney and Melbourne, which have vacancy rates around the 1% mark, have recorded the largest jumps in weekly rental rates, with house rents increasing by 17.7% and 14.9% respectively over the year to July. Nationally, rental yields continue to improve on the back of rising rents; houses on average are returning a gross rental yield of 4.3% and units 5.1
As property value growth remains sluggish in some areas, and rental rates continue to power ahead we can expect rental yields to show consistent improvements. For investors the prospects are quite compelling: strong buying conditions and the prospect of improving returns. For renters the news isn't so good – expect further rent rises and more competition for quality rental stock.
Extracts from RP Date Property Pulse 19th Sept.
