Investors flee city apartment turmoil

Investors who provide rental accommodation are virtually out of most markets. Picture: Richard Walker

The slump in inner-city Melbourne apartment rents is sending shockwaves through the national apartment investor market.

Well-located Melbourne inner-city apartments that were renting for around $415 a week in 2019 are now on the market at around $300 a week --- a reduction of more than 25 per cent. Naturally as the news spreads, it is crunching the value of these apartments and making bankers around the country even more nervous in lending money to investors buying units.

But the special forces impacting the Melbourne apartment market are totally different to Sydney and other Australian capitals where rents, after a smaller fall, are now starting to rise again.

Indeed the land tax structure in Sydney, which was designed during the boom, could now create a severe apartment shortage, with spiralling rents, if students return.

Melbourne in the last decade became the fourth largest university city in the world and combined with abundant land and reasonable regulations an apartment building boom was created. The late starting projects in the boom are now reaching completion. Accordingly if Chinese students return they will enjoy abundant low-cost accommodation, in stark contrast to Sydney.

The Sydney boom saw Chinese developers pay incredible prices for Sydney land and the NSW government, understandably, wanted a big slice of the action. Effectively it imposed a land tax regime that meant the developers and investors paid a 15 per cent land tax, which is around five times greater than other states. To that is added one of the most cumbersome and delay-prone development approval processes in the world.

As building starts slump, Sydney rents are on the rise again. Picture: Picture: Jenny Evans

The Chinese developers have packed their bags and taken big losses (not just because of the land tax), and nowhere near the Melbourne level of inner-city apartments were developed.

In Sydney rates of approval and starts have now slumped despite the fact that many people are returning to the city because travelling large distances is too stressful. Although there is a substantial reduction in overseas students, Sydney apartment rents are now again on the rise.

However house values are rising at a faster rate than apartments with the forward momentum being driven by owner-occupiers.

Investors who provide rental accommodation are virtually out of most markets. Higher than owner-occupier interest rates, the difficulty in getting investor bank loans and higher real estate values creating lower yields have seen investors flee the market.

That means it is becoming incredibly difficult to rent houses not just in Sydney but around the country, including in Melbourne.

This is of course forcing people into buying. But there will remain a big rental market that is going to require much higher rents to attract investors back in. In apartments in every capital city except Melbourne we are seeing that higher rent trend start to emerge.

NSW apartments have always been burdened with higher taxes than houses but it is now planned to lower the gap and increase the land tax on investor-owned houses. Once again the higher tax is being imposed during a boom but the government will need to be very careful not to make the same mistake as with apartments and leave the taxes on when the boom passes.

Footnote: At last there is some good news for lockdown-plagued Victorians. After many commentaries from myself and others, WorkSafe Victoria has finally started to look at the obvious breaches in the occupational health and safety regulations that led to 801 deaths and the lockdown suffering, including the latest lockdown.

Apart from my commentaries, they were also under pressure from their staff, many of whom were appalled at the failure of WorkSafe to do its job properly.

Until WorkSafe launches prosecutions and forces the government to use proper prescribed systems in hotel quarantine there will be more lockdowns. But if WorkSafe does require the state government to finally act in accordance with the occupational health and safety rules and quarantine is transferred to either Avalon or Melbourne airport then Victoria will be able to take the overseas students required the fill the apartments ---if the students are allowed to come.