Investor sales expected to rise by 2024

According to the latest research by InvestorKit, while investor activity has experienced a slowdown, 2024 is expected to usher in renewed demand as interest rates gradually ease.

The report highlighted rental growth is projected to continue in Australia’s capital cities and key regional areas, with the potential for double-digit percentage increases in many rental markets.

Arjun Paliwal, founder and head of research at InvestorKit, anticipates annual rent increases ranging from $2,600 to $3,900 in the next 12–24 months as investors leave the market and demand surges.

“We have seen an increase in investor sellers in the market adding to the diminishing rental supply, alongside a lack of new build completions for investors coming on quick enough,” Mr Paliwal said.

“In the near-term, Australia’s rental supply, especially in capital cities, will be further tightened until investors start purchasing more actively, construction improves and household sizes shift up due to cost pressures.”

Presently, the cost of building a house is 28 per cent higher than it was two years ago, significantly impacting new construction activities, with a 40 per cent reduction in monthly new building approvals, he explained.

With the ongoing shortage of rental properties and sustained demand, Mr Paliwal expects rental market growth to continue in 2023, with Melbourne and Sydney leading the trend due to the return of international students and increased migration.

Over the past 12 months, both Melbourne and Sydney have witnessed approximately 9 per cent rental growth and this trend is anticipated to persist.

“Internal migration is also an emerging trend this year, with Queensland, Western Australia, and
South Australia proving popular due to employment opportunities and strong lifestyle factors, but greater market affordability,” Mr Paliwal said.

While rental growth is appealing to investors, Mr Paliwal emphasised that their decision to re-enter the market considers various factors, including capital growth prospects, financing costs (such as cash rates and investor loan interest rates), cash flow (rental income, maintenance costs, taxes, and fees), among others.

Given this, he said: “We expect investors to become more active once two major obstacles are removed: declining inflation and lower cash rates.

“Finance brokers can expect two types of property buyers flocking into the sales market next year when there’s more confidence around cash rate cuts: investors chasing high rental returns and first home buyers who have decided to pay mortgages instead of rents.

“The increase in rental supply (investor purchases) and decrease in demand (renters moving to the sales market) will, as a result, ease the rental crisis in the short term.”

Australia’s rental crisis sparks inquiry

Australia has witnessed a nationwide rental crisis over the past three years, with the national average vacancy rate dropping to 1.0 per cent in late 2022 and again in January 2023, reaching the lowest point since 2006.

Given the scarcity of rental housing, soaring inflation, and consecutive interest rate hikes, a Senate inquiry investigating the worsening rental crisis in Australia is underway.

In a submission to the inquiry, the Real Estate Institute of Australia (REIA) has recommended implementing more incentives for vacant properties and short-stay rental providers to encourage their conversion into the long-term rental market.

Additionally, the REIA has suggested long-term stamp duty reforms and waivers for purchasing rental properties in areas of high demand.

As governments seek to address the crisis, the Victorian and NSW governments have announced changes to disincentivise short-term rental arrangements.

Victoria’s recent housing reforms imposed a 7.5 per cent levy on investors in short-term accommodation, while the NSW government has authorised the Byron Shire Council to tighten restrictions on short-stay accommodation in a similar move.

This development has raised concerns among brokers in the region, who suggest it could worsen the housing crisis.

Mr Paliwal emphasised that such rules aren’t a “determining factor" for how an investor makes a decision. He pointed out that short-term rentals make up only 6 per cent of Australia’s rental properties.

The rental crisis continues to be a pressing issue and the outcome of the Senate inquiry, along with potential policy changes, will play a crucial role in addressing the housing challenges facing the country.

“The majority of investors see the long-term rental market as their major playground while possibly considering short-term rentals as an add-on to their portfolio,” Mr Paliwal said.

[Related: Brokers raise concerns over NSW rental rules]