Episode Details

It has certainly been a wild ride for property investors over the past 6 years. 

In 2017 and 2018, the banking regulator demanded banks reduce the volume of interest only loans, particularly to investors. The media called this the “interest only cliff” and predicted that many borrowers would face financial stress when loan repayments switched to principal and interest resulting is higher arrears and default rates. It didn’t. 

Then in 2018-2019, Bill Shorten (you will recall that everyone was expecting him to win the 2019 federal election) promised to ban negative gearing and increase capital gains tax which unsettled property investors. Of course, he didn’t win, and the ALP abandoned this policy. 

Of course, the Covid years (2020 and 2021) were very kind to property owners. But aggressive interest rate hikes over the second half of 2022 have ruined the party and property prices have retreated to pre-Covid levels in many locations. 

Despite a relatively volatile period, it is important to note that property fundamentals remain very robust. In fact, it is vital that investors remain solely focused on these long-term fundamentals and not get distracted by these temporary volatility events. 

Rental crisis will only get worse 

There is a shortage of rental properties in Australia and as a result, rents are rising quickly. According to Domain, the national vacancy rate was a mere 0.8% with Perth, Adelaide and Hobart essentially reporting close to zero vacancy. Melbourne and Sydney’s vacancy rate has fallen from 2.7% and 1.9% respective to only 1.0% over the year to January 2023. 

Over the 2022 calendar year, rents have risen by almost 20% nationally. Of course, these rises are coming off a lower base, due to rental reductions during Covid, but the trend is strong and doesn’t look like it will abate anytime soon. The chronic shortage of rental properties will continue to put upward pressure on rents. You should expect to see a lot of media coverage this year about the growing rental crisis. 

Tighter rental laws could be to blame… 

Tighter rental laws certainly do dissuade people from investing in property. One of the most attractive advantages of being a property investor is control – you have full control over how you use and improve the asset. Tighter rental laws (that favour tenants) reduces the amount of control investors have over their property (like the ones Victoria rolled out in 2021). They also increase the cost to run a rental property thereby reducing investment returns. 

Whilst tighter rental laws have reduced investor demand (and therefore the number of rental properties available), I think it’s only been at the margin. That said, any further regulation would most likely have a material impact on rental supply. Tenants must be protected, but a healthy rental market is equally if not more important. 

But I think the main cause of the undersupply is… 

There are fewer rental properties in Australia today because there are fewer investors buying property (owner-occupiers have dominated the market) and more investors have sold existing investment properties.

According to data by PropTrack, approximately 15% of vendors are investors (i.e., people selling their investment properties). The proportion of investors selling property increased to between 20% and 25% over the past few years during the Covid property boom. Obviously, many investors took the opportunity to cash out whilst property prices were booming during 2020 and 2021. 

For the 6 years between 20

My new book is available for pre-order now: Pre-ord