Falling rents could have a scarring impact for years

Falling rents could have a scarring impact for years

The drop in demand for rental properties has proven so severe that it may lead to a development fall of hundreds-of-thousands of apartments in the next few years, according to a forecast by a government agency.

The National Housing Finance and Investment Corporation (NHFIC) claims from 129,000 to 232,000 fewer apartments, townhouses and houses could be developed within the next three years due to the sudden drop in migrants weakening rental demand.

The modelling, featured in the report “COVID-19: Australia’s population and housing demand”, comes as the property market experiences a period of volatility, where city apartments and houses are dropping in value and tens of thousands of people are anticipated to sell their homes as they struggle to repay mortgages.

“Large falls in underlying dwelling demand, particularly due to substantial falls in international students, are already putting upward pressure on vacancy rates and downward pressure on rents in inner city suburbs,” NHFIC said.

“If sustained, this could cause a contraction in construction activity that will add to the recessionary forces that are impacting the economy.”

Fewer overseas travellers means fewer renters: NHFIC

The rental consumer price index fell in the June quarter for the first time in the 48 years records have been kept, according to the Reserve Bank of Australia (RBA), a phenomenon that it said took place because of rental reducations and cheaper rental listings.

One reason for the softening rental market has to do with a plunge in visiting overseas migrants -- both tourists and international students -- who are no longer coming to Australia because of the imposed travel restrictions intended to curb the spread of COVID-19.

Net overseas migration (NOM) accounts for 60 per cent of Australia’s population growth, NHFIC said. About half of them are international students who likely rent apartments on the outskirts of Australia’s eastern cities, they added.

The stagnating population growth is weakening rental demand to the point where it could slow down the construction of new developments through 2023, NHFIC said, hurting an industry that’s important to Australia’s economic recovery.

“The health response to COVID-19 has created a formidable roadblock and highly uncertain outlook for population growth and demand for housing,” the report said.

“If this decline is sustained, it could cause a contraction in construction activity that will add to the recessionary forces impacting the economy.”

Add finished developments and holiday properties: RBA

There are few signs that growth will return to the rental market this year, the RBA said, as the drop in demand coincides with holiday properties and new developments flooding the market.

“The COVID-19 pandemic is an unprecedented shock to the rental housing market, reducing demand for rental properties at the same time as supply has increased,” the country’s central bank said in a bulletin yesterday. 

“The number of vacant rental properties has increased as new dwellings have been completed.”

The fall in overseas migration has resulted in another factor further exacerbating the softened rental market, the RBA said. The drop in holiday travel has led to short-stay properties offering longer leases, particularly in the already competitive Sydney and Melbourne markets.

“On the supply side, with the number of international tourists and domestic travellers falling, a large number of short-term accommodation providers have shifted their properties onto the long-term rental market,” the RBA said. 

“The vacancy rate has increased sharply in some markets.”

Tens of thousands of new units: Corelogic

Development of tens-of-thousands of new units is underway in the capital cities bracing the steepest rental reductions.

More than 50,000 units were under construction in NSW and more than 45,000 were being built in Victoria as of the end of March, according to Australian Bureau of Statistics building data cited by CoreLogic.

Increase supply drop in rent corelogic.JPG

The influx of new apartments comes as the two states brace double digit rental falls in the three months to July, the RBA said. Melbourne CBD rents plunged by 13 per cent, while in Sydney’s eastern suburbs, Manly and Leichhardt areas, rents tumbled by more than 10 per cent.

“These areas were more adversely affected by declining demand from fewer international students and the conversion of short-term accommodation to the long-term rental market,” the RBA said.

Did you find this helpful? Why not share this news?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.