A new problem for property investors

the biggest risk for the sector is that property owners who run out of options will place more residential property onto metropolitan markets.

The residential investment property market is showing serious signs of strain as escalating rental disputes combine with falling prices.

In Victoria, the hardest hit state, a blow-out in registered “rental cases” has sparked a warning the sector could soon trigger a run of investor bankruptcies.

Commenting on an estimated backlog of more 4000 rental cases before VCAT (The Victorian Civil and Administrative Tribunal), the president of the Real Estate Institute of Victoria, Leah Calnan, says: “The situation is getting steadily worse as disputed cases mount, we are seeing investors running into real trouble with no effective avenue open to resolve situations where tenants will not pay.”

In March, a nationwide plan to protect tenants in the downturn was launched that included an eviction “moratorium” under which evictions are not allowed. Evictions are rare in residential property with only 4 per cent of disputes reaching this point. However, they are seen as an effective deterrent in the property system.

The national agreement has been interpreted differently in each state. Officially, Victorian property owners and tenants are expected to sign formal agreements to allow rent reductions - more than 32,000 such agreements have already been lodged.

But Calnan suggests many more rent adjustments are settled outside the system by mutual agreement, while other tenants simply do not pay.

“Many tenants simply refuse to communicate and we are now getting massive arrears in rent being borne by the property owner with little likelihood of it being repaid. We are going to start seeing bankruptcies soon if something is not done about it.”

The REIV has called for immediate expansion of resources in the state’s dispute resolution agencies.

Meanwhile, Victoria has already extended the eviction moratorium past its original deadline of September 29 out to the end of the year which means some property owners could face less income - or no income - for up to nine months.

As rental disputes accelerate at state appeal tribunals, house prices continue a restrained drop nationwide.

CoreLogic’s August report says Australian housing values recorded a fourth month of decline with national prices 0.4 per cent lower over the month, and 1.7 per cent lower over the quarter.

Property analysts are now suggesting Victoria will have the worst cumulative falls over the course of this downturn.

Shane Oliver, chief economist at AMP Capital, has said he expects capital city average prices to have a 10 per cent to 15 per cent top to bottom fall.

However, Oliver says Melbourne could see a total decline of up to 20 per cent (it has already fallen 4.6 per cent).

For existing - and potential - property investors the biggest concern is that the deteriorating situation is occurring while the government’s supportive programs in JobKeeper and JobSeeker are still in place.

Moreover, in terms of property finance, the banking system is also temporarily supporting the sector. Almost one in three of more than 500,000 deferred home mortgages across the banking system are owned by property investors.

Clearly the biggest risk for the sector is that property owners who run out of options will place more residential property onto metropolitan markets where clearance rates are already very weak.

Regional markets are in a different cycle with CoreLogic suggesting they are continuing to outperform capital city counterparts.

Separately, building approvals figures for the month of July surprised on the upside, but economists suggest the 12 per cent jump in monthly residential approval would not change a much weaker picture expected for residential activity over the next 12 months.

“The weakness in housing construction and prices being centred in Sydney and Melbourne likely reflects previous outperformance in these cities, along with greater housing and economic impacts from reduced migration and international student activity. This has resulted in rising vacancy rates and lower rents,” says NAB Markets Research.