Rebound Vacancies below 1 per cent and strong demand is driving renewed interest, writes Duncan Hughes.

Residential rents rising as fast as property prices are attracting investors seeking higher yields, a hedge against inflation and generous depreciation and tax breaks. House rents in some of Australia’s capital cities have risen between 15 and 20 per cent during the past 12 months as supply fails to keep pace with a sharp rise in demand, particularly in higher-density, regional capitals.

‘‘This will attract more investors into the market,’’ says Louis Christopher, chief executive of SQM Research, which monitors property markets.

Investor borrowing, which was running out of steam in February after increasing around 116 per cent in the 12 months to last May 31, is expected to rebound even more strongly as competition grows, says buyers’ advocate Cate Bakos.

Andrew Wilson, chief economist for My Housing Market, a property consultancy, says stock surpluses are being rapidly absorbed around inner-city Melbourne, Sydney, and Brisbane.

‘‘Investor interest is accelerating because of capital growth, rising yields and high demand,’’ says Wilson.

According to SQM analysis, national residential property vacancies are about 1 per cent, the lowest in 17 years and half the amount for the same time last year.

Vacancy rates in Sydney and Melbourne are 1.6 per cent and 1.9 per cent respectively, while in Brisbane, Adelaide, Canberra, Darwin, and Hobart they have fallen below 1 per cent, its analysis shows.

Rents for apartments in Sydney’s central business district have jumped 5.5 per cent in the past 30 days. In Melbourne, rents are up more than 7 per cent in the same period.

In some areas surrounding regional and state capitals, there are no rental properties available. Rosalie Day, managing director of Bell Real Estate, which covers three postcodes around Gembrook, some 65 kilometres south-west of Melbourne, says: ‘‘There are no rentals. If we put anything up for rent, it goes straight away.’’

Day blames restrictive local council regulations, high state government taxes and rising property prices, which have encouraged many landlords to sell.

Many landlords also decided to sell because of issues caused by a freeze on rental increases and tenant evictions during the COVID-19 lockdown.

SQM’s Christopher adds: ‘‘What is happening is unprecedented. A shortage of properties is causing market rents to explode’’. He expects rental prices this year to increase faster than house prices.

In 2021 national house prices rose about 22 per cent, the biggest increase since 1989, says Shane Oliver, chief economist for AMP Capital. This stemmed from record low mortgage rates, home buyer incentives, the pandemic driving a switch to housing, a lack of supply, and fear of missing out.

Demand for rental homes is this year expected to increase because of the strengthening economy, easing of COVID-19 restrictions, and the return of high levels of migration and students, says analysis by the National Housing Finance and Investment Corporation, a government think tank that monitors housing demand, supply, and affordability.

Adding to the pressure in NSW and Queensland is homelessness caused by flooding.

Buyers’ agent Bakos says it’s unusual for investors to enjoy both rising income and capital gains. She adds: ‘‘Many investors turn to bricks and mortar if nervous about the stock market or global outlook.“

Confidence is also boosted by the absence of any federal election policies that might lead to a cutback on generous negative gearing concessions or depreciation allowances.

Property is also an effective hedge against inflation, according to Cushman & Wakefield, a global commercial real estate company. Its analysis shows every 1 per cent increase in inflation is associated with a 1.1 per cent increase in total property returns (capital growth and income).

Investors account for about one-third of mortgages, an increase of about seven percentage points over recent months but below the decade average level of 35 per cent, says CoreLogic, which monitors property markets.

Lenders are easing tough borrowing terms for investors, say mortgage brokers.

‘‘They are lowering interest rates and improving terms, such as allowing more rental income to be included in the loan eligibility assessment,’’ adds Phoebe Blamey, director of Clover Financial Solutions, a mortgage broker.

The accompanying tables from Canstar, which monitors rates, shows the cheapest deals for investors seeking principal-and-interest or interest-only loans.

These rates are typically about 130 basis points lower than average loans on offer.

‘‘This highlights the importance of shopping around for the best deal,’’ says Belinda Williamson, Canstar group manager.

Average investor loan sizes increased to more than $556,000 from about $477,000 in the 12 months ended February 28, says Tim Lawless, CoreLogic’s research director.

‘‘Investor lending growth is biggest in areas where housing prices are generally lower than Sydney and Melbourne,’’ Lawless says. These include south-east Queensland, inner-city Brisbane and Adelaide. AFR