Inflation hits landlords’ cash flows as rents struggle to keep up

Australia’s inflation is hitting property investors’ cash flows harder than expected as rents grow at a much slower pace over the past decade.

A study by the Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA) showed that rents increased by 11% from 2012 to 2022 while inflation went up 25.6%.

PIPA and PICA used data from the Australian Bureau of Statistics (ABS) Consumer Price Index from June 2012 to June 2022.

On an annual basis, rents went up at about 1% yearly versus the more than 2% annual growth in inflation.

Looking at the rental growth across capital cities reveals how worse rents are performing relative to inflation, with only Hobart reporting a higher rental gain.

Former PIPA chairperson Peter Koulizos said even with the recent spurt of rental price pressure, rental growth was not able to keep up.

“As well as their cash flow taking a hit because of this income versus inflation imbalance, investors have also had to finance a huge variety of additional costs levied by all levels of government over the past decade,” he said.

“Governments deserted the supply of affordable rental properties years ago, expecting private investors to simply take over this responsibility, however more and more investors are deciding that it is just not worth it.”

Are investors starting to retreat?

PIPA chairperson Nicola McDougall said activity from property investors remain below historical average and this is largely driven by the restrictive lending rules set in 2017.

“From that period of on, the supply of rental properties started to dwindle because investors simply could not qualify for finance – but this research shows that rents have not kept up with inflation,” she said.

“Since the start of the pandemic, investors were initially asked to ‘take one for the team’ and supply free or low-cost housing to their tenants and are continually expected to pay higher costs for everything property-related — from council rates to stamp duty.”

Mortgage commitments from the investor segment slowed down in June 2022, with the value of lending declining 6.3%.

Investors now comprise 33.8% of mortgage demand by value, down from the recent peak of 35.75% recorded in April but significantly higher than the record low of just 22.9% in 2020.

Ms McDougall said many investors already feel that they “had enough” and are forced to sell.

“And let us not forget that 71% of investors own one property and 90% own just two – this has always been the case – contrary to popular opinion about a plethora of mega-rich people who seemingly own dozens of properties,” she said.

For PICA chairperson Ben Kingsley the financial burden that market conditions have brought upon investors is contributing to the overall rental crisis in Australia.

“The current rental crisis is the result of government inaction and market interventions — there is no question that governments, at all levels, have played the biggest role in the rental supply mess,” he said.

“We just prey they wake up to themselves and start valuing the vital role that ‘mum and dad investors’ play in the provision of housing in this country – or step up to the plate and come up with a viable and achievable plan to greatly increase the supply of rental properties in this country.

Australia’s vacancy rates declined to 0.9% in July, the lowest point on record according to Domain’s latest report.

The decline in vacancy rates was due to a 45.4% annual fall in vacant rental listings.

Atlas Property Group director Lachlan Vidler said investor activity has been muted for several years and while confidence started to improve a year ago, market factors seem to trigger a new round of dampening.

“Investor confidence only started to improve about a year ago, but now that rates are rising and borrowing capacity is being assessed at interest rates well above market projections, many are once again unable to secure finance,” he said.

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Photo by Andrea Piacquadio from Pexels.