Sydney rental market on verge of oversupply – Louis Christopher

The Sydney rental market has recorded the highest vacancy rate in at least 13 years according to Louis Christopher from SQM Research.   He says the Sydney rental market is just about at the tipping point and he explains what that means for owners and investors.
Kevin:  The Sydney rental market has recorded the highest vacancy rate in at least 13 years according to SQM Research. Joining me from SQM, Louis Christopher.
Hi, Louis.
Louis:  Hi there, Kevin.
Kevin:  Louis, just looking at your report here, I think you’re saying that the Sydney rental vacancy rose to 2.8%. It’s getting very close to that 3% threshold that we’ve talked about in the past, isn’t it?
Louis:  Yes, that’s right. And importantly, the trend is up. Vacancy rates have been rising, we think they’re going to continue to rise, and it is becoming increasingly a tenant’s market in Sydney. And certainly, in some areas, particularly in Sydney’s northwest and the Hills district, the lower north shore and Sydney’s eastern suburbs, we’re recording rental vacancy rates well above 2.8%.
I think the highest rental vacancy rate we have for any individual locality in Sydney is Kellyville running at about 7.1%.
Kevin:  Wow. To keep this in perspective, it’s almost 20,000 rental properties that are vacant. How accurate is that figure? I know I’m asking you who generated the report, but we hear a lot of properties that aren’t necessarily reported as being vacant that are vacant. Could it be higher than that, Louis?
Louis:  This is a measure of properties advertised as available for rent. There are definitely properties out there that are unoccupied and not being advertised for rent. That segment of the market is very hard to measure, and we take the view that, okay, they may well be unoccupied, but if they’re not available for a tenant to rent, they’re not on the market, they shouldn’t arguably be counted as being a property that’s available for rent and vacant.
Whatever your view is on that – and people have various views on those types of properties – we’re simply measuring those properties that were advertised over the course of June and have been on the market for at least three weeks and longer.
Kevin:  Yes, so these are available rental properties. I guess that’s the differentiator, isn’t it?
Louis:  That’s the differentiator. That is correct.
Kevin:  I see in your report that Hobart is one of the hottest rental markets in Australia. That’s all to do with the boom that’s happening down there, do you think?
Louis:  That’s right. We have the vacancy rate at just 0.7%. There are just 220 properties vacant and available for rent in Hobart. Keep in mind, of course, Hobart is a relatively smaller town when we compare that city versus, say, Brisbane or Sydney. Nevertheless, it’s very tight. It’s a landlord’s market. Rents have been rising at above 8% per annum now for the last two years. Now, of course, they’ve come from a very low base.
And the reason why we’re seeing such a tight rental market in Hobart is a two-fold reason. Number one, since about 2015, the Hobart economy has been doing really well. That’s as a result of a good state government there doing the right things by the Hobart community in terms of the economy, as well as a lower Australian dollar compared to what we had back in 2012.
And Hobart is one of those economies where when you see a lower Australian dollar, it generally thrives. That, plus the fact that even while the vacancy rate has been getting tighter in Hobart since about 2015, property developers haven’t been coming to town. They have not been building.
And I’ve been speaking to property builders as to why: “Why are you not taking advantage of this opportunity?” The answers I get back are it’s just too costly to actually build there right now and developers being concerned that they may not get the financing to buy in Hobart.
But it actually does really boil down to cost. I had one developer say to me “I literally would have to ship in a lot of the raw materials from the mainland to get the development going.” And that certainly adds to the cost.
I think, though, that when you look at the most recent numbers, developers are starting to take the risk and build in Hobart, so our view is that over the next two years, we’re likely to see vacancy rates starting to rise again.
Kevin:  It’s interesting when you look at the vacancy rates in your report and then you look at what’s happening with those weekly rents. You can really see it coming through, change week on week with drops in Canberra, Sydney, also in Adelaide, Hobart, and some in Melbourne in houses. Then you look at what’s happened year on year: there’s a fairly dramatic drop year on year out of Sydney, which is what you’ve indicated.
Louis:  Yes, that’s right. You have to be a little bit careful about looking at rents on a week-by-week or month-by-month basis even, because there can be seasonality in those numbers for the rents. But the 12-month change really can tell the story.
As you’ve rightly pointed out, we’re now recording a fall in rents in Sydney of about 2% for houses over the past 12 months, whereas when we looked at Hobart, rents are up by 8.5% for houses and 10.4% for units. So, quite a variation occurring there, but more in line with what we’re seeing with the vacancy rates.
Kevin:  Houses in Canberra have improved well year on year at 13% on last year. How much of that has to do with supply and demand? Because I know there are a lot of properties taken off the market in Canberra with that Mr. Fluffy debacle, weren’t there?
Louis:  Yes, that’s correct. We have a current vacancy rate in Canberra of just 0.9%, so it is really tight, and hence the reason why we’re recording houses up for rent by 13%.
I generally found with the Canberra housing market that it’s fairly closely correlated with federal government spending and elections. And as you come up to an election, for example, the government starts spending more money on consultants as an example, and those consultants generally will come to Canberra and live in Canberra while servicing the federal government, and that has an impact upon the housing market.
And whenever you see a situation where the federal government is cutting spending – and they normally do that, for example,  after an election in the first year – that can have a negative impact upon the Canberra housing market.
Kevin:  Louis, great talking to you, mate, thank you, and a tremendous report. Louis Christopher from Thanks for your time, mate.
Louis:  Thank you, Kevin.

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