Why you should be watching the rental market

Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome to the Property Nerds podcast, and I'm your co-host Arjun Paliwal, joined by Kent Lardner. Hi Arjun.

Hey Kent. We've got a very exciting episode today, and today's episode is all about rental market data. Now, just to give you some background on who we are, the Property Nerds, I'm Arjun, the founder of InvestorKit and co-founder of the Property Nerds. InvestorKit's a buyer's agency focused on helping investors buy residential and commercial property. And Kent and I have teamed up together for the Property Nerds, and we're here to really bring a lot of data, a lot of insights, and share anything and everything we can by going deep into the numbers of property markets.

And Kent, a little bit about yourself. Yeah, so obviously the other half of the nerds, but also I run a business called Suburb Trends, which is very much focused on content for the real estate sector. So real estate agents, buyers, agents, et cetera, talk to me if they want content for social or their website. Awesome. And Kent, rental markets.

Now, this is an interesting one to talk about. And the reason why I feel we should really go deep into this is we're always talking about hotspots for locations. People tend to want to know growth and things like that. But the rental market, I've always seen it as one of the most important indicators of assessing a market's true health and assessing an investor's potential to hold the asset, which is what we all want to do long term, as well as just get a feel for real demand, what's really happening in that location. What are your thoughts on just the importance of rent?

Well, it's been fascinating in the last 12 months because of COVID and the exodus of the cities into the regions. And one of the first markets to move was obviously the rental market because a lot of people looking to buy in a location outside of their neighborhood would go and rent typically. So we're still seeing that right now, whereas they exit Melbourne, exit Sydney and go out to one of these regions and they would rent first up if they couldn't find their dream property from day one. So they go in and rent first. So we're seeing the impact of that right now.

It's huge. And the other advantage, obviously, the rental markets is very fluid. And, you know, economics has also taught us that rents is actually the truest form of demand, in my opinion, right? Because housing for owner occupiers is not only, I guess, a consumption piece for them to live in, but it's also an investment good, right? Because they're going to think of the appreciation that can come.

Yeah. And if you're owner occupied, you're tied into that property, typically, what, 12 plus years for a house and five, seven years for a unit. But with the rental space, you're really only bound for that lease term. So if the market's going one way or the other, you're only really bound for a number of months before you can make a decision and move on. And I think, you know, what you've talked about there, the timing of which someone's bound in is a great way then for us to assess a strong and fast shift in demand or supply because transactions to buy and sell and think of changing the buying decision.

These things take time to enter and exit, whereas the rental markets, we've seen some areas which we'll talk to today being absolutely sucked up and just completely now having no listings available almost. And you've had other areas which have seen an opposite trend occur. So I guess when we go into the rental market data, today's episode would be great for us to not only help people get better in interpreting rental data, but understanding the different things we must consider and then go into a couple of markets. And I've noted down a few different things we should go through. So I'll just jot them out.

Firstly, we've got rents, yields, rental days on market, vacancy rates, over 21 day rentals, rental tenure, and then thoughts from property manager perspective. So should we start off with yields? An interesting topic. It is. It is.

So most yields are presented at a suburb level. We dwell on this quite a lot, obviously, is measuring a median at a suburb is a volatile metric. Most suburbs have pretty small sample sizes. So it's a problem. Now, when we're calculating a yield, it's probably twofold.

You've got the median price, sale price, and then you've got the median rent price. And most yields are obviously calculated from those two. If you're in a suburb with very few sales, that yield could bounce around a lot. So I wouldn't be too dependent on a suburb level yield. I would look at it certainly from a snapshot.

There's no question you would do that. But what I prefer to do is look at it at a region level. And our go-to is that SA3 region. Calculate your yields there or look at your trends at that level and then drill down to the individual property. What's a property listed for?

What is it selling for? What's its estimate for rent? And Kent, I've noticed there's also another thing that you and I talk offline quite about, and it's aligning data to types of properties, right? This is an interesting one because a yield of a four-bedroom, two-bathroom premium property in a suburb versus the three-in-one affordable young couple or downsizer or young family, there's a big change here. Big spread.

And so as a result, this is where yield data from a suburb again can trip you up. And this is where we like to even look at yield by three-bedders sometimes. Yeah, so that's what we do. A lot of the metrics that we play around with and publish on the property nerds on our data hub, we're actually using two-bedroom units when we do the unit stuff. Now, I don't think we put too much unit stuff on the site because we're staying away from units at the moment.

But on the housing front, we drill down and use the three-bedroom because at an SA3 level, you've got a pretty decent sample there, and it's really well distributed. Pretty much most of those SA3 regions that we're analyzing when we're playing with the three-bedroom house as our metric, it's really well distributed, really neat. And this, I guess, guys, for anyone looking at yields, this is a great way for you to then measure the return on your investment property. And with where interest rates are at the moment as well, Kent, it's not requiring as much yield as it used to to be in that territory of neutral to positive cash flow. So that's another interesting thing about today's times.

The next data piece I've got here is rental days on market. Would you like to explain this one, Kent? So most people obviously are familiar with days on market from a sales perspective, but another really good metric is how long a rental property is advertised for before it disappears. So rental days on market, and what we like to look at and what we like to espouse is not relying on a single metric. So if I'm looking at rentals or looking at sales data, I like to kind of walk around it 360 degrees and get a few angles.

And one of those is to look at rental days on market as well as looking at the trend of the days on market. So I've got a current snapshot. Is it 20 days? Is it 30 days? Whatever.

But is it trending up or down? And that gives me a great lead indicator as to where the market's going. And the days on market's an interesting one because I feel like each will have their own ranking of what's a good time or a long time. And we've got our own thoughts on this, and this is where we have a cutoff where we call 21-day or more rental listings stale. Yeah, so it's just a vacant property.

What do we call a vacant property? Well, if it's been listed for 21 days or more, it's a vacant property. Now, you can define that any way you want, but that's our definition. If you hold that steady and you hold that through time, that gives you your indication. So again, you've got your snapshot.

What is it today? And what is that delta? What is the trend? And with that, you know, the three-week period that you mentioned, so typically when there is a tenanted property, that two to four-week periods of notice time gives you enough time in that listing period to find that subsequent tenant. So two weeks and below has always been a very healthy and buoyant rental market.

And with over 21-day rentals, not only do we like to look at it from a vacancy rate perspective, the count of properties over 21 days in comparison to the rental stock, but we're also looking at it as an overall count itself. Like, hey, there were 200 properties in an SA3 or region, and this time last year that's now changed to, say, 150 over 21-day rentals. So we love seeing trends change in an area too. Exactly. And if you're looking at the count of properties over 21 days, it puts the vacancy rate into perspective, especially at a suburb level.

So you can count and say, hey, this particular suburb has five properties that are vacant, and there were two a month ago. So I think that's a really nice way to look at it, whereas I think sometimes your vacancy rate as a percentage can bounce around a little bit. But when you look at it and say, how many properties are vacant now, and what was that three months ago or a month ago or whatever, it just gives it a nice perspective. And with rental data, the fact that it's so live and it's so happening right now, the beauty about it But at the same time, they don't want to buy the multi-million dollar houses. Then out comes this rental market that can easily outperform the national average in terms of size.

We're talking 40-50% in some regions. And then we've seen a clear pattern of very fluctuating rental vacancies just because there's more stock for it to do that when the times change. Other things that I think we don't acknowledge as much in terms of on data is not just the data we get in our reports and the back end that we see, but it's the data that property managers feed us. And so this is an interesting one when it comes to rental markets and where I feel that as an investor, not only should we take a grasp of what's being seen online, but this is that point I was referring to before of you should really get involved with local property managers, finding out the goods, the challenges, what the local demographic likes to see. And they should, in most occasions, be in line with what data we're seeing.

But some locations of late have not been having the best times for certain property managers. Life's been harder in certain areas. And I think this could be great where we now look at all these trends and talk to some of the data. How about we start off with maybe some of the regions where we see a trend that's not going so well? Yeah, so there's a number of regions.

We look at these SA3 regions that have had a significant increase in vacancy rates between the month ending as of February, month ending as of March. And the bulk of these are in and around Melbourne. So these are the outside of the CBD, just that outer ring. So effectively, I'll name some of these SA3s, which may or may not have a lot of meaning, but Whitehorse is another one, Stonington East. Now, I don't know if I'm pronouncing this one, Maribyrnong or Maribyrnong.

Anyway, Melbourne West. Finally, one I can pull you up on. I can get Monash, right? The list goes on. Now, what we've got here is 10 regions that have had the highest increase in vacancy rates, and eight out of the 10 are in and around Melbourne, within that 5K, maybe up to 10K radius in and around Melbourne.

So it's all happening in and around Melbourne. If you're a property manager in Melbourne today, our heart goes out to you because it's tough, right? If you're a landlord in a Melbourne right now, you're doing it tough. Two out of the 10 are in Sydney, Auburn, which we know, so that belongs to the broader region of Sydney, Parramatta. And the other one's Hurstville.

And again, both of these locations are high-density locations, high-rental tenure locations, to the point earlier. So Hurstville belongs to the broader region of Sydney, inner southwest. So anyway, what we've got is 10 regions there that have all jumped up. Across those 10 regions, and a lot of the ones I couldn't pronounce, sorry, there's over 7,000 vacant properties. So that's just that.

Now, that ignores the inner ring CBD locations. But the interesting list were the regions that have decreased in vacancy rates. Really interesting. So I've done a top 10, but what I wanted to do was pull out three that are the most interesting. And the three are the West Coast of Tasmania.

And why that's so interesting is it's dropped by 4. 3%, but it's moving into a territory that's massive. But where is it now? It's down to 1. 6%.

Now, give it a few weeks. I think next month when we're on the podcast, we're going to be saying that's below 1%. So the West Coast of Tasmania has gone through a massive transformation. So that's the first one. The second one, surface paradise, right?

The whole of Southeast Queensland is gone nuts. Now, this has dropped by 3. 4%. It's now 1. 7%.

I'm going to make a bet that that one will also fall below 1% next month. This is very, very big. These shifts are not small, especially in the market sizes these are as well in terms of the surface. That's a big market size because when we looked at the regions on the other direction, for all the listeners, we're also talking to all dwelling types. And so this is surface paradise has a lot of apartments.

And so for that too, to be that tight and strong shows a clear shift of lifestyle preferences. Yeah, the whole of Southeast Queensland, it's gone crazy. The other one that was of interest, and this one is really fascinating, Southport has fallen 1. 8%. But guess where it is now?

It's half a percent. That's very tight. So it's crisis levels, right? Effectively no available rental stock. And the media throughout Queensland have been highlighting this.

It's getting a lot of airplay talking about how tough the rental market is. And the other one is an article that was out in the Courier Mail last week talking about how few suburbs are left under the 500K mark in Brisbane. And so this is really showing some interesting trends around the country because with these regions that you've mentioned, I've had a look at the broader picture of Australia as a whole, and there isn't a lot of high vacancy regions. Now, we're talking 18. 9% of SA3 regions in Australia have vacancy rates of 3% plus.

That's a fairly small number of overall regions. 57. 85% have vacancy rates of 1% or below. So more than half of the regions, more than half of the markets that we're analyzing, another way of saying it, more than half the suburbs across the country are in a crisis with regards to rental. It's huge.

Almost two-thirds now. We're getting close. And I think over the next month, we should hit that number or get close to there by the sounds of everything. And so this really touches on an important one where many people can sometimes, if you wind the clock back to COVID, we're talking about the borders and migration and everything that's happened. I've had a lot of discussions on forums where they're a bit stumped as to, hold on, how can all these regions have such tight vacancy rates and we haven't had all these people come in?

This is the importance, I feel, to recognize a group of property owners and renters that is much more important in terms of the capability to shift data sets. And that is the movers and stayers. The migration that happens internally. The movement between people from one suburb to another or a region to another is far more greater in impact, in my opinion, than just your typical population growth metrics and what happens because they're capable, they're ready, they're intent-driven, they're usually renting as well but can have capability at times to buy, localized. This is a huge shift that we're seeing.

So it just shows you how even amongst all of these conditions, we aren't seeing those massive vacancy rates in most detached dwellings. Well, I think it's interesting to see the interstate migration and the impact of the net outflow of people from Melbourne especially. And we've got that on the data hub, which I'm just trying to pull up now. But I think that's a fascinating thing to see and the implications are huge, obviously, with the volume of people moving out of the CBD, specifically out of Melbourne, and the implications that's had, obviously, especially on places like Southeast Queensland. And right now, we're seeing some rare things happen across the country, which has got the positive and negatives to it.

So what I'm seeing for the first time in a long time is a lot of rental campaigns start to have more than the offer price or asking price being thrown at the property manager. And this is starting to put people in uncomfortable positions. We've got the side of, you know, even landlords I'm often finding in conversations, our property owners are receiving these calls from their property manager saying, look, I know we put it at 500, but do you want to take 530? Now, in some cases, it can be a red flag as to why is someone offering that much. But this is slowly becoming a bit of a norm because the property managers aren't adjusting as quick as they could to what the heat conditions are saying.

And people are just being blown away by what's happening. And the opposite side of it is that there are a lot of people who are just not able to find places. It's a real problem. And I highlight this as a big problem for a family who's located in a region who are being squeezed out. And it's very hard for them to pack up and go into a unit in a Brisbane or in a Melbourne or in a Sydney.

So you've got a job in the suburbs or a job in the region. Where do you go? Now, we're obviously seeing spikes in detached dwelling approvals with the government stimulus and home builder and all these benefits. Do you think that's enough? I think community housing needs a big shot in the arm, but you can't turn this stuff around on a dime.

And I go back to that white paper that I read that highlighted the benefits of having a larger rental pool specifically focused on Germany. I think in Germany, I think the rental market's about 50% total available properties. And the implications of that, that they avoid this particular crisis. So when there's a flow between regions, it can absorb it much better. So their economy is stabilized, the housing market's stabilized.

So there's a really good white paper on this. And it makes a lot of sense. And I think what we've got to do is really build that up from where we are today, 33, 34%, and probably look towards that 50% mark, but make a lot of that community housing. That's my personal view, because with this K recovery, it's not good.