Rent controls will force mum and dad investors to exit

Rent controls are poised to become a major threat to investors as the Victorian government is set to overhaul the state’s property rules.

The spectre of looming rent controls or ‘caps’ has already spooked potential investors nationwide.

The Queensland state government introduced new tighter laws for property owners in April.

Property industry groups have warned that any move towards rent control will worsen the national rental crisis as it reduces the supply of available rental stock.

At the same time, a steady exit of property investors from the residential market in recent months could accelerate dramatically if government intervention is added to the mix.

Queensland recently introduced a once a year rule on rent increases while the Victorian government is reportedly looking at rules that will only allow a rental increase once every two years along with further potential caps.

Private investors own the vast majority of Australian rental property.

But ‘mum and dad’ owners have been shifting out of the market as rates run higher and long-term returns continue to weaken.

For decades investors operated on the basis their would double their money every seven to ten years, but this rule of thumb was contradicted by a Proptrack report this year which showed it has taken 15 years for prices to double.

Meanwhile rental returns – despite the rental crisis – remain weak in terms of ongoing earnings with yields on term deposit accounts now competing with property income.

Investors who thought they were buying into a ‘market’ were rudely awakened by the rental mortarium that was rushed through during the Covid-19 period.

Having recovered from that period, investors now face a potential new wave of re-regulation.

A newly released report from investment bank Jarden has shown firm evidence that private investors have already been exiting the market.

Against a long-term average figure of 30 per cent, the portion of investors behind new listings has risen to 36 per cent in Melbourne and 40 per cent in Sydney.

Separately, this week the real estate group, Ray White reported a doubling of investor auctions sales.

The exit of a property investors from the market can reduce the amount available to rent as properties revert to owner occupiers.

The immediate effect will be to reduce rental vacancy rates which remain at a severely low level of less than 2 per cent across the major urban centres.

In Brisbane, where there was an exceptionally large volume of interstate landlord sales at the top of the recent cycle in 2021, the city later become the market with the worst vacancy rates in the nation.

A nationwide repeat of the Queensland experience is now on the cards as a range of state governments stand ready to move on the property market in a way that will not improve the terms for investors.

However, in Victoria where Premier Dan Andrews has indicated ‘everything is on the table’ in relation to a plan to overhaul the state’s property system, the issue is set to become acute.

Private property holders in Melbourne endured a price downturn along with Sydney investors in but they have not had the same price bounce back this year – Sydney prices moved more than six cent higher over the year to date while Melbourne prices barely inched higher at 1.1 per cent year to date.

Though renters who have faced double-digit rent increases will be sceptical over the reportedly poor returns in property.

The changing numbers in the rental market means that investors will keep pushing rents higher as their own costs – largely dominated by higher interest rates – continue to escalate.

As the Oxford Economics group reports, “higher interest rates have significantly lifted the mortgage costs for landlords who are keen to balance their cash flow through higher rental incomings – we expect rents to increase 11 per cent in 2023 and 4 per cent in 2024”.

The experience overseas especially in the UK in recent years has been that government intervention coupled with high rates has mean large numbers of mum and dad property investors have thrown in the towel – the same risk is now clearly present in the Australian market.