From peak to trough
Over the 2012 financial year, home opens were flooded with prospective tenants offering more than the asking price. Fast-forward to the present and a ‘tenant’s market’ has now emerged. Excess supply and sluggish demand in the rental market mean that prospective tenants are now overwhelmed with choice – they have a greater power to negotiate for lower rent.
According to the Real Estate Institute of Western Australia’s ‘Market Snap Shot’, the rental vacancy rate in Perth has increased from 0.7% in August 2012 to 4.7% in June 2015. While median rents have dropped by $40-$50 per week over the same period.
In areas where oversupply is concentrated, such as the Perth CBD, we are also seeing average rent reductions fall. In some cases we have seen rents fall as much as 25%, particularly at the higher end of the scale.
What’s causing the slow market?
The rental market is heavily influenced by supply and demand factors, and in Perth we are seeing a high supply of rental properties with a low demand from tenants.
A ‘building boom’ has seen the production of many new apartments and multi-residential dwellings, increasing the supply of rentals. Compared to the same time last year, there is now 43% more rental stock available.
Slow demand can be attributed to the general economic downturn, spawned by falling commodity prices, stunted employment prospects and slowing population growth. Demand from tenants has also fallen due to an increase in first homebuyers.
With an influx of new housing stock to be completed next year, supply is expected to remain in excess of demand and it will take some time for the market to re-adjust.
Minimising the harm with your rental
Those who saw great gains during the market peak in 2012 may be struggling to come to terms with a drop in average rent. But, it’s important that property owners don’t disregard any potential long-term investment gain when renting out a property, even if it means a reduced weekly rental income.
There are certain things that investors can do in order to minimise harm in a soft rental market.
We offer the following advice for those renting out a property in challenging market conditions:
1. Endeavour to keep a quality existing tenant. Tenants are increasingly aware of the market and are more likely to stay if they believe their rent is fair and reasonable, and that they are being treated well. Avoid losing a quality tenant and gaining a vacant property by reducing your rent in line with market conditions.
2. Choose new tenants wisely. Although you do not want your property left vacant – doing your homework and finding a quality tenant is worth it to avoid problems and maximise your returns in the long term. In a renter’s market you have to be particularly careful to attract the right tenant.
3. Makeover your property for the long-term. Sometimes an overall facelift, like a paint job or new carpets can add a fresh feeling that flows through the house. If you are considering specific alterations or renovations, question if the renovation will add value to your investment property. For example, a cheap, modern bathroom renovation may not add the desired value to a period house, where other rooms have an old-fashioned feel.
4. Engage with quality property management services. Property professionals will help you navigate a slow rental market. Using a reputable property manager can help ensure that your property and tenants are well looked after, which may help you maximise your rental returns.