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Safe as houses

Australians have long had a love affair with property – not only to live in, but also to invest in. Indeed, we’ve always had one of the highest home ownership rates in the world (around 70 per cent of households), not to mention the more than 1.5 million Aussies who own investment properties. The appeal of investment properties? Potential capital growth, rental income and tax benefits.

Residential property has consistently proven to be one of the best ways of building wealth over the years. For example, in Sydney the median price of houses more than doubled in the 10 years to 1996.

This long term growth in the value of residential property in most major cities in Australia has occurred even though some years showed a decline in price. While all investments have some elements of risk, the history and the track record of successful investors show that residential real estate is an essential part of a balanced investment portfolio.

There continues to be strong demand for good rental housing, with around 30 per cent of Australians renting their homes. And with population levels continuing to rise (according to the Australian Bureau of Statistics our population is growing by around 1.5 per cent per year), it stands to reason that there will be increasing demand for rental properties.

A good barometer for the level of demand is vacancy rates. Traditionally, a vacancy rate at around three per cent indicates a balanced market that discourages rent increases. Below three per cent, demand outstrips supply – and rents rise.

On a national basis, the residential vacancy rate has hovered around 1.8 to 1.9 per cent for the last few months. According to SQM Research, this rate could be an indirect result of the continuous lack of buyer interest in the housing sales market of late.

Across Australia, most major cities have been experiencing record low vacancy rates.

In Sydney, the rental vacancy rate in October 2011 was 1.3 per cent for properties within a 0-10km radius from the CBD. The picture is slightly better in metropolitan centres outside Sydney, with vacancy rates up 0.6 per cent to 1.9 per cent in Newcastle and up 0.2 per cent to 1.8 per cent in Wollongong. On the Central Coast, vacancy rates were down 0.2 to 1.7 per cent.

Across Australia it’s a similar story. Perth and Canberra proved to be the nation’s tightest rental markets in October, with Canberra holding steady at 0.7 per cent, while vacancies in Perth fell 0.2 per cent to match Canberra. Conversely, Melbourne led capital cities in vacancies, with a rate of 3 per cent. In October there were almost 11,000 properties available to rent, up 0.8 per cent compared with the previous year.
“It is very possible we will see Melbourne vacancies continue to rise from here as there is, even at this point in time, new stock still just being completed new,” says managing director of SQM Research, Louis Christopher.

Rents on the rise
For property investors, a combination of factors makes investing an appealing situation. The housing market remains soft across Australia’s capital cities, but conversely rental growth has been solid (helped along by the tight vacancy rates).

According to the Australian Bureau of Statistics, the dollar value of rents has been rising at a four to five per cent pace during 2011.

The good news for Sydney landlords is that rents are increasing. Over the past year we have seen Sydney rents increase by 5.9 per cent for houses and 5.4 per cent for units. That brings the weekly rent for a typical Sydney house up to $550 and to $513 for units.

In Brisbane, house rents were up 4.8 per cent and unit rents up 8.4 per cent, while in Perth house rents increased 10.1 per cent and unit rents by 6.8 per cent over the year. In Melbourne, rent on a house has increased by just 1.9 per cent over the past year and unit rents have remained flat.

In South Australia, investors can find some solid returns in the current real estate market with yields in certain areas recording nearly five per cent, according to the Real Estate Institute of South Australia (REISA).

REISA data shows that whilst the sales market is slower than recent years, there is still plenty of opportunity for astute investors. REISA President, Mr Greg Moulton, said that yields of over 4.5% can be found in outer metropolitan Adelaide and in key regional centres and these suburbs should catch the eye of investors.

“The latest yield data is showing that there is substantial opportunity for investors in the Adelaide metropolitan area, as well as key regional centres, and many of these areas have a purchase price of less than $250,000,” he says. “There is real opportunity out there right now, especially as property prices have softened a little, so now is the time to start thinking about investing.

“With the assistance of a professional property manager, a nest egg could quietly grow into quite an attractive retirement holding, so it’s never too early to think about long-term investment.”

Supply vs demand
In Sydney, Brisbane and Perth there is a common denominator causing the strong rental conditions – new housing supply which is insufficient relative to growth. For example, the number of dwellings that commenced construction across NSW during the June quarter was just 6696. This compares with Victoria, where housing demand is virtually the same as NSW, and where there were 14,684 dwelling starts.

In Queensland, the number of new homes that started construction in June 2011 was 34 per cent below the long-term average, and in Western Australia new dwelling starts were 13 per cent below average. New home starts in Victoria were 30 per cent higher than the long-tem average.

With the Australian housing market remaining soft in many areas, according to the October RP Data-Rismark Home Value Index, there may be some good buys to be had by investors. Capital city home values dropped four per cent over the 10 months to October, although in Darwin home values were up 2.4 per cent over the three months to October.

Rismark’s managing director Ben Skilbeck says: “While home owners and property investors have endured a 2.8 per cent tapering in actual home values over the course of 2011, rental growth has been very solid.”

Investors seeking to maximise their rental return are advised to buy where rental demand is likely to be the highest and supply constraints are evident. Established suburbs close to major working nodes are generally a safe bet, as are suburbs close to universities and major public transport hubs.

 City  Vacancies Sep '10
 Vacancy %
 Vacancies Aug'11  Vacancy %  Vacancies Sep '11  Vacancy %
 Sydney  6,178
 1.2% 7,769
 1.4%  7,894
 Melbourne  7,986  2.2%  10,197  2.8%  10,926  3.0%
 Brisbane  4,594  1.8%  4,673  1.9%  4,893  2.0%
 Adelaide  1,410  1.0%  2,311  1.6%  2,378  1.7%
 Perth  1,923  1.2%  1,559  1.0%  1,436  0.9%
 Canberra  262  0.6%  289  0.6%  308  0.7%
 Hobart  281  1.2%  448  1.9%  485  2.1%
 Darwin  291  1.3%  215  0.9%  216  0.9%
 National  39,682 1.5%
 46,923  1.8%  48,179  1.9%

Source: SQM Research


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