The impact of the current crisis on rental markets

The property investment landscape keeps changing almost daily as our governments struggle to keep the economy afloat with new directives and incentives. John Lindeman urges investors to hang in there, because the long-term outlook for rental markets is likely to be totally different to the situation we are facing right now.

There will be a short-term increase in rental supply

As a result of the shut down in the travel, hospitality and recreational industries and a near total movement lockdown, the short-term rental market has collapsed. Owners of holiday homes, short stay rental accommodation and Airbnb type lettings are desperately trying to reposition their empty properties to attract longer-term tenants.

This is leading to a rise in rental vacancies, particularly in areas previously favoured by business travellers, tourists and holiday makers. In addition, many tenants are downsizing, seeking cheaper living options as they try to cope with reducing incomes. The short-term impact for property investors in many locations will be falling asking rents, reduced cash flow and longer vacancy rates. 

For some landlords there will be another hit to their cash flow, with some media outlets portraying the “no eviction” directive as a form of tenant relief, or an excuse for tenants not to pay rent.

The Real Estate Institute of Australia is urging tenants to keep paying rent, as not to do so could affect their credit rating and tenancy record.

Eviction

Even so, there will some who take the opportunity not to pay the rent, while others may be unwillingly forced to go into arrears. This will then have a knock-on effect for investors, as some landlords may decide to sell their properties rather than face the grim prospect of paying the costs of providing accommodation for tenants who are not paying rent in return.

However, abandoning the property market right now could be a huge mistake, as the longer-term scenario for property investment paints a much healthier picture.

There will be a longer-term increase in rental demand

There are two facts that property investors should keep in mind, once we have hopefully safely emerged from the other side of this crisis. The first is that the supply of rental properties will be much lower in future than it is right now.

  • Some investors will sell their properties because they can’t hold on or because they believe that the situation will only deteriorate further.
  • The construction of new housing, especially high and medium density off the plan developments is slowing down.
  • Many potential property investors are adopting a wait and see attitude until they believe the crisis is over and the economy has recovered.

Taken together, these circumstances will lead to a serious shortage of rental accommodation once the crisis has passed.

The second is that the demand for rental accommodation will rise, both from existing households who become renters and from higher numbers of overseas arrivals, most of whom must rent for years before they become sufficiently established here to be able to buy a home of their own.

Australia has always been seen as a land of hope and opportunity after such international tragedies, and this is highly likely to be the case again. The graph shows how our population growth rates peaked in the years following international crises such as the First World War, the Second World War, the Petrodollar crisis and the Global Financial Crisis. 

Even more revealing is the fact that our population has always grown, even during the worst years of war or recession – we have never experienced an actual fall in population, unlike many other countries. This has generated a continuously rising demand for housing, especially in our larger cities.

Once the crisis is behind us, rental shortages will emerge and asking rents will rise again, especially in high density precincts and well-established suburbs. housing prices will follow as property once again becomes the investment asset of choice for most investors. The message from this is; don’t panic – hang in there if you can.