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