Vacancy rates could tighten despite a rise in rental vacancy

Louis Christopher from SQM Research explains that despite a rise in rental vacancy rates in April, the view going forward is that the market will tighten

Introduction: Why vacancy rates could tighten

 Ross Greenwood: I want to take you now to property prices, because one interesting aspect of property is that right now, rental vacancies have started to rise across Australia. Now, if rental vacancies arising, that would technically be actually good news for those people that are renting and would imply that there has been some form of cooling in the property or housing markets across the nation, because generally of course more places are vacant, if there is either fewer renters or indeed that there are more properties coming onto the market and higher vacancies, generally mean a tendency for cooling in prices. Is that the sign or is it not? One of the men who does some of the best research on property markets in this country, is Louis Christopher from SQM Research. He’s done it. I think the answer might be a little surprising to you. Louis, many thanks for your time as always.

Interview with Louis Christopher, SQM Research

Louis Christopher: Ross..

Ross: Okay. So tell me, does the fact that you have just reported that rental vacancies are rising right across Australia as we speak, is that a sign that property markets are starting to cool down?

Louis: The answer is no. We did record a rise in the month of April vacancy rates nationally and they are 2.4% up on 2.3% in March and steady, when we look at April 2016. Now, what actually happened in March, was that we recorded a steep decline in vacancies, and I think what’s happened in April is we just had a slight retracement. Overall our view going forward, is actually there’s a chance of vacancy rates tightening, as the year progresses now, because what’s been going on in the country, is we’ve been getting a lot faster than expected population growth rates and that’s been absorbing a lot of the stock in the market place, particularly the rental market.

Ross: So in other words, what you’re saying is that there is a very significant chance, as we’ve seen, the building stats are starting to cool off, that many of the apartments in our big cities are starting to become completed, so that’s bringing that new capacity of apartments in particular onto the market, but as soon as they are filled, unless there’s more building, unless the banks are actually starting to encourage the developers to get out there and build even more stuff, if the population keeps on growing, that we could find ourselves in exactly the same position that we’ve been in the last three or four years and that is our major capital city house prices, start to have a pressure to rising price again.

Rising prices again

Louis: You’re spot on Ross. No, I think that’s being the new development, the fact that it seems now that we’re hitting the peak of dwelling completions and you may recall this time last year, it came from the Reserve Bank, it came from other bodies as well– Putting up there the fear or the concern that perhaps we’re going to have a significant oversupply, come later 2017, 2018 in the Sydney, Melbourne and Brisbane apartment markets in particular.

Well, the way it’s playing out is, yes, we’ve had an oversupply situation in the Brisbane apartment market, no question about that. But in Sydney and Melbourne, no. The additional population growth rates is far higher than what anyone expected, has been absorbing that new stock and you’re right to state that now we’re having a declining building approvals, meaning that forward dwelling completions are going to be lower, that bouquet vacancy rates could actually fall as a result of this, come later 2018, 2019 in particular, we’re quite concerned about it and now, given the new budgetary measures which have cut down negative gearing benefits, we could certainly see, less investors in the market which could put further pressure on rents.

Impact of negative gearing

Ross: Okay. Let’s explore that for a moment, because that’s important just to explain why that would happen. Now, the negative gearing changes have largely been glossed over by many people in the analysis of the budget, but it is important that it has to do with depreciation schedules. Just explain to people what’s taking place and why that’s so important for investors appetite to buy properties and also the potential future of property values.

Louis: Yes. This was overlooked last week, but yet it was a very important announcement made by the federal government. Basically, what is happening is that from 1 July onwards, the government will limit plants and equipment depreciation deductions to only those expenses directly incurred by investors. Now, what this means is breaking it all down, is that if you are an investment property, you’d be well aware that you can actually get a depreciation deduction on things like your fridge, your air conditioning, the lights and so forth, and for those who own an existing investment property, they will still get that. But the issue comes when if you want to sell that investment property to another buyer, that buyer no longer gets those depreciation deductions and it actually means many thousands of dollars, generally speaking, plants and equipment depreciation will equate to at least 50% of your total depreciation deduction, in some cases, 100%.

Ross: Because there might be lifts, because there might be common areas, because there could be pools involved, because there could be big communal staircases, all these things if you buy– In particular in a high-rise building, the plant and equipment inside that building is significant, and as a result you as the owner get your share to be able to depreciate.

Louis: That’s exactly right Ross and look, the rules could actually be worse so it could actually be very punitive, because a literal interpretation of the new rules may well mean, that a buyer that buys an off the plant development, doesn’t get the plant and equipment depreciation deduction anymore, because the governor’s said that whoever buys the plants and equipment gets a deduction. So in theory, the developer has bought the placement equipment, not you, therefore you don’t get the deduction and many quantity surveyors out there, they’re literally reading it– They’re taking that interpretation and the government has yet to clarify the position.

Ross: That would be massive if they do that. So as result, people would be therefore less inclined to trade on their properties and/or if they did trade on their properties, the investor buying in, because they don’t have those immediate tax deductions, might be not inclined to pay the price that they previously would have paid.

Louis: That’s right. So a live example is, let’s say, I own a property and I’ve just renovated by the tune of $200,000. Now, I get the depreciation deduction on any plant and equipment I put in there whether that’s be a new kitchen, whatever it may well be. If I sell it to you Ross, and I’ve just put in that rent out, you can’t claim the plants and equipment even though it may well be new plants and equipment that’s gone in.

Ross: And generally our schedule goes over three years, four years something like that?

Louis: Depends on exactly what you’re claiming, in some instances it can go by five years maybe even 10 years. It is critical and I can see now a lot of quantity  to fix their business, but they are up in arms so they can see what it does actually mean for the market. In our view is that this potentially could be enough to slow the market down, which is great potentially for first-time buyers, but there may well be ramifications for developers in terms of putting new stock into the market, hence my previous comments about what rents may well do.

Ross: Gee, that could be interesting because if there ends up being a shortage of property in the market with population inflow, then guess what? You get a squeeze and basically it starts to take off at some point down the track. The managing director of SQM Research, Louis Christopher explained that brilliantly to you. Some of the pressures that as a result of the budget changes that have taken place, that could really genuinely short-term, longer-term affect the value of property and apartments up the East Coast of Australia. Louis, always great to have you on the program, we appreciate it this evening.

Louis: Good to be here Ross.


Money Minute – May 25 2017 “Investor Revolt”

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