Time to Invest?

As predicted, the McGowan government’s decision to extend the emergency response provisions of the Residential Tenancies Act (RTA) for a further six months has helped shape a rental shortage into a rental crisis.

The potent combination of subdued investor activity for several years, massive foreign investment taxes, subdued yields and capital value losses has combined with strong repatriation demand from West Australians returning home. The result is a vacancy rate across Perth of under one percent; the lowest level for twelve years and only the third time in thirty years, vacancies have been so low.

With rents increasing and yields improving, investors normally emerge and add much-needed rental stock to the market but the extension of the COVID-19 emergency laws impacting all residential tenancies has kept investors away.

These savagely low vacancy rates are driving up rents as tenants desperately compete to secure a home in a market starved of supply.

By the time the emergency provisions of the RTA expire in late March next year, the upward pressure on rents will be at pressure-cooker levels. The current ban on rent increases for the 98.5 percent of tenancies unaffected by COVID-19 simply compounds the build up of rent increase pressure.

If the emergency laws had been adapted to apply only to COVID-19 impacted tenancies, rents would have probably risen from last month but only incrementally.

In a market where rents are rapidly rising, existing tenants are understandably staying put whether they’re impacted by COVID-19 or not. Many of these tenancies will convert to periodic leases by the time March comes around. Lease renewal negotiated at this time will probably be around 15% above current levels with sitting tenants unwilling to pay the extra moved on in favour of new tenants that will.

Tenants are well advised to save some funds now for when rents ramp up in March.

Property investors remain spooked by the lack of certainty around the emergency laws making up only 17 per cent of all sales in recent times, well down from 30 per cent normally. Foreign investors who rent out homes are discouraged to buy too, paying around $55,000 in stamp duty for a $500,000 investment property.

The shortage of supply and the promise of rising rents post March may stir investor activity and add some supply but meanwhile, the current shortage is causing major blockages across the market. Perth home owners keen to return to Perth and move back into their homes can’t, workers keen to take advantage of our strong economy can’t secure accommodation and vendors are reluctant to sell unconvinced they’ll be able to secure a six-month rental if they don’t find an alternate home. Despite the uncertainty, investors should return to market now with interest rates low, rents increasing and property values on the move.