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Residential property More than one in four landlords are considering selling their investment properties and quitting the rental market, writes Duncan Hughes.

Sam Collis is debating whether to keep struggling with three mortgages for two investment properties and his home, or to sell a property and ease the financial stress from interest rates rising faster than rental income.

It is a question asked by increasing numbers of property investors struggling to make ends meet after buying investment properties when rates were at record lows and rental payments easily covered costs.

‘‘I could be heading towards selling if it gets much worse,’’ says Collis, a Victoria-based father of three children aged 10 to 15, who has had his properties valued ahead of a possible sale.

‘‘I sometimes walk into the supermarket and wonder whether I can afford a packet of chips. But the problem of selling now is that it would be a knee-jerk reaction that I’d probably regret in five years when markets improve,’’ he says.

The number of investment properties on the market across private treaty and auctions has jumped from about 20 per cent – 25 per cent of the monthly total to more than 30 per cent, says CoreLogic, which monitors property markets.

It peaked at 35 per cent in 2021, which was a bumper year for property sales because of record-low interest rates.

One hundred per cent of suburbs with house rental markets and more than 97 per cent of suburbs with unit markets in Melbourne and Sydney are cashflow negative, which means there is more cash leaving the property in higher costs than being received in rents, CoreLogic research shows.

‘‘Landlords have been pushing rents higher to offset the rising cost of debt, but there is a limit to what the market can absorb, and we are close to that now,’’ says Tim Lawless, research director of CoreLogic. ‘‘Rental price growth is slowing.’’

A Sydney property investor with a $1.2 million house for rent and $960,000 loan is spending about $30,000 a year more in costs than received in rents, forcing increasing numbers to sell their properties.

Rent rises of about 9 per cent a year to a median monthly value of $3200 are failing to offset the 15 per cent fall in the property’s value and rising interest rates, which are around 30 to 44 basis points higher than for an owner-occupier, analysis by CoreLogic, which monitors markets, shows.

A basic variable rate for owner-occupiers is 5.39 per cent and 5.69 per cent for investors, a difference of 0.30 per cent, says RateCity, which monitors interest rates.

The gap expands to 0.44 per cent for discounted variable. In Melbourne, the annual shortfall for a median investment property worth about $900,000 is $22,000 as prices fall 11 per cent and rents rise by about 8 per cent, analysis shows.

‘‘Increased compliance costs, reduced landlord rights and ability to manage their properties, increasing interest rates and falling property prices means landlords are leaving the market,’’ says Andrew Kent, president of the Australian Landlords Association.

Negative gearing, which allows a tax deduction if expenses exceed income, can only be claimed once a year, adds Lawless.

Tenants are responding to rising prices and falling supply by increasing numbers sharing rental properties, a reversal of what happened during COVID-19, and choosing units, which are usually cheaper.

There are more than 2 million property investors in Australia, which is about 8 per cent of the population, the Australian Taxation Office says. About 70 per cent of investors own a single property.

Investors are bailing out of the market despite national residential property rental vacancies remaining about 1 per cent with capital weekly asking rents around 21 per cent over the past 12 months, says SQM Research, which also monitors property markets.

Tight markets are under increasing pressure from a surge in demand from rising immigration, the return of foreign students and more people moving back to the cities after COVID-19.

More than one in four NSW landlords are considering selling their investment properties and quitting the rental market, according to a survey by the Real Estate Institute of NSW (REINSW).

‘‘Changes to tenancy laws and lack of consideration for landlords’ rights are overwhelmingly cited as the reason investors are leaving in favour of other investment opportunities,’’ says Tim McKibbin, REINSW chief executive.

Louis Christopher, SQM’s managing director, says there are signs the rental crisis is easing in Canberra, Darwin and Hobart.

Christopher asks: ‘‘Could we be seeing some light at the end of the tunnel for our national rental crisis?

‘‘Perhaps for some cities and regions. But we still remain very concerned for the situation in Melbourne, Sydney and Brisbane where most international arrivals land first,’’ he added.

Cate Bakos, a buyers’ agent, adds many older investors are deciding ‘‘it’s time to cash up and retire’’ amid concerns landlords could be hit with caps on rent rises and restrictions on negative gearing,

But Nerida Conisbee, chief economist for Ray White Real Estate, says the proportion of investors selling at its auctions has fallen from a peak of 28 per cent to 21 per cent in the seven months to February.

‘‘The number of investors selling at auction was far higher in the months prior to when the downturn began and in the months following than it has been in the past six months,’’ says Conisbee.

‘‘Fewer are selling now given that prices have come back, but also because rents have risen so much, thereby providing a buffer for higher mortgage costs,’’ she says.

There might be an increase in sales of investment properties no longer providing enough of a return, she says.

‘‘If so, given that fewer investors are buying, it will result in even more pressure on rents,’’ she says.^SI

Apartment rents have surged over the past year, delivering income windfalls of up to $11,000 for investors across suburbs gaining the most.

The sharp rental increases – with 57 suburbs rising more than 20 per cent – have come as vacancies hit a new low of 0.9 per cent across the combined capital cities during February, CoreLogic data shows.

They also reflect rising demand for the cheaper, high-density sector as renters trade space for affordability, said Corelogic research director Tim Lawless.

‘‘Rental affordability pressures may be forcing a transition of demand towards higher-density rental options, where costs tend to be lower,’’ he said.

‘‘Additionally, the strong rebound in foreign student and international migrant arrivals would be adding to rental demand, particularly in inner-city precincts as well as areas close to universities and transport hubs.’’

Suburbs in Sydney’s inner south, eastern suburbs and inner west dominated the list of the top 10 biggest gainers, led by the Sydney-Haymarket-The Rocks area, where unit rents climbed 27.8 per cent or $211 a week to $969 – a $10,972 annual rental gain.

Meanwhile, apartment rents in the Waterloo-Beaconsfield, Kingsford, Redfern-Chippendale and Arncliffe-Bardwell Valley areas rose more than 27 per cent, or $171 a week on average.

Melbourne topped the areas with the fastest rate of rent rises for apartments over the year, climbing 38 per cent and adding $168 to a $612-a-week rental.

Five other inner-city areas also notched up more than 21 per cent annual rental gain, including South-bank, Carlton, Docklands, North Melbourne and South Melbourne.

In Brisbane, the Margate-Woody Point area north of the central business district, and four other inner-city areas including Kangaroo Point, West End, Spring Hill and Fortitude Valley all recorded more than 20 per cent rental increases in the past year.

However, rental growth for houses has slowed as worsening affordability and the higher cost of living weighs on tenants’ budgets.

‘‘We have already seen some evidence that rental growth is topping out, especially in the more expensive low density sector, where rental growth was much stronger through the pandemic,’’ said Mr Lawless. ‘‘This easing in rental growth has nothing to do with a supply response or less overall demand – it probably has more to do with renters reaching a ceiling on what they are able or willing to pay.

‘‘With rental growth substantially outstripping incomes over the past few years, it is likely more renters will be looking for alternatives to ease their rental payments.’’

Canberra posted the sharpest slowdown in house rents, easing from a 10.5 per cent annual increase at the height of the pandemic to just 0.8 per cent over the year to February.

In Sydney, house rents stabilised at 8.9 per cent annual growth during the past three months, slower than the pandemic high of 10.2 per cent. All the other capitals except Melbourne posted slower gains for houses in recent months.

But with vacancy rates staying around record lows, rents were likely to continue to rise at least through the rest of the year, Mr Lawless said.

‘‘Over the short to medium term, the rental supply outlook is looking pretty glum,’’ he said. ‘‘From a new dwelling perspective, approvals are at their lowest level in more than a decade.’’

Private-sector investment, another indicator of rental supply, was also still going backwards, as investment home loan numbers had been declining since early last year, Mr Lawless said.

‘‘Against this scenario of limited new rental supply, demand looks set to rise further, based on the influx of overseas arrivals,’’ he said.

Kent Lardner, founder of data provider Suburbtrends, said vacancies were likely to fall further as rental demand continued to outpace supply.

‘‘The rental supply in the near to medium term is alarming. Building approvals are well below population growth rates,’’ he said.

‘‘Based on my analysis of building approvals over the last five years and comparing those to population growth, around 95 per cent of suburbs nationally will have inadequate rental supply in the coming years.’’