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Investment rentals face vacancies, lower rent and mortgage defaults due to border closures: Corelogic

Investment rentals face vacancies, lower rent and mortgage defaults due to border closures: Corelogic

Investors face empty properties, lower rents and a tougher time servicing their mortgage due to overseas migration falling to its lowest level in more than a century, analysts warn.

Australia’s population growth is forecast to fall 56 per cent -- from 350,000 in 2019 to 154,000 in June 2021 -- to its lowest level since 1917 largely due to a shortage of tourists and migrants, according to recent projections from the Treasury.

The fall in overseas migration -- to 31,000 in the financial year ending in 2021 from 232,000 a year earlier -- could have sweeping implications on the rental market as they constitute a large portion of tenants, Tim Lawless said, head of research at CoreLogic.

“The implications of net overseas migration remaining well below average are broad ranging,” he said.

“...The likely outcomes of low net overseas migration will be higher volume of rent listings, and falling rent values across key inner city precincts.”

The effects are already taking place: Corelogic

The trend can already be seen in rental properties located in inner Sydney and Melbourne, Mr Lawless said, as the border closures instituted to curb the spread of COVID-19 prevents migrants from entering the country and signing leases.

“Investors who own property in these locations are likely to be facing high vacancy rates, lower rents and reduced ability to service their mortgage,” he said.

“This may result in more distressed sale listings in these regions.”

Unit rents in Melbourne and Sydney have fallen more than 4 per cent since March, Mr Lawless said, outpacing the falls of other cities.

International students may help demand in these areas rebound once international travel restrictions are eased, he said, but until then, these areas face the risk of being sold “at a valuation lower than contract price”.

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$1,421

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3.55

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2.17

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2.69

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Demand is down, but a flood of units are coming

The weakened demand brought about by a drop in migration numbers could be met by an oversupply of developments in some cases, CoreLogic said.

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.

“A large proportion of these are high rise projects in inner city locations,” Mr Lawless said.

“Many … will settle while rental vacancies remain high and rents are falling, which may put downwards pressure on property values.”

Demand for the type of apartments that typically appeal to investors will remain law, he said, adding developers should pivot towards owner-occupier projects driven by low interest rates and the government’s HomeBuilder scheme.

The suburbs expected to be impacted the most

About 84 per cent of overseas migrants flowed into Sydney and Melbourne, mainly finding places to rent around the city where apartments are commonplace, or in the suburbs close to tertiary institutions and transport hubs, such as Parramatta in Sydney or Clayton in Melbourne.

Rental vacancies have already shot up in these areas as a result of overseas migration drying up, CoreLogic said.

The number of homes available to rent in Melbourne’s Southbank rose by 117 per cent to 1230, between mid-March to early August, while Melbourne’s CBD saw a 105 per cent rise to 2184 rental listings.

The number of available homes across central Sydney -- the CBD, Haymarket and the Rocks -- similarly experienced a spike in rental listings. Over the same March to August period, ads increased by 111 per cent to 1230.

But the rise in vacant apartments is not solely owed to a fall in overseas migrants, Mr Lawless said. 

“The demand shock in these areas has been broader than the impact of stalled net overseas migration,” he said. 

“Rental demand is also impacted by weaker labour market conditions amongst highly casualised industry sectors such as food, accommodation, arts and recreation workers. 

“...Additionally, fewer workers may be demanding rentals in the CBD’s due to remote working arrangements.”

Banks slash interest rates for investor mortgages 

Lenders have been slashing interest rates for investor mortgages out of cycle to official cash rate cuts.

A RateCity analysis found 47 mortgage lenders reduced their interest rates over the last two months; of which, 27 offered rates below 2.5 per cent.

The cuts -- from major lenders including NAB and Macquarie Bank, as well as smaller players such as Homestar Finance -- were about 0.27 per cent on average, for those made from mid-June to mid-August.

Average variable rates (P&I and IO)
Owner-occupiers (%)Investors (%)
March 20203.904.21
August 20203.553.90
% change Mar-Aug 2020-0.35-0.31
Average fixed rates (P&I and IO)
March 20203.523.74
August 20203.043.20
% change-0.48-0.54
Average rates (fixed and variable, P&I and IO)
March 20203.693.92
August 20203.263.48
% change-0.43-0.44

Source: RateCity.

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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

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