Oversupply of apartments in Canberra market is good news for renters
Several readers were keen to point out that there is an upside to the problems facing the off-the-plan apartment buyers discussed in Asset Check last week. The emerging oversupply of apartments in the Canberra market appears at long last to be creating a renters' market.
Apparently landlords are having to reduce weekly rents to attract and retain tenants. There are now close to 3000 properties now available for rental, three times as many vacant rental properties than at the beginning of the year.
This overhang of vacant properties will make life even more difficult for off-the-plan investors whose apartments are in the final stages of completion and who will be seeking a tenant to help fund their investment. Fortunately for them, the negative gearing tax deductions are still available during the period they or their agents are actively seeking tenants and will also help cushion the adverse impact on their returns from offering lower rents to attract a tenant.
Nevertheless, the cash flow problems created by vacant properties not rented for a substantial time and by lower rents will add to the downward pressure on apartment prices. For borrowers yet to complete their purchases, the increase in vacancies is also increasing the difficulties in obtaining finance to settle the purchase.
Just how serious these problems for investors will be very much depends on how long the reduction in available jobs in the Canberra area continues. Reduced job opportunities immediately flows through as reduced rental demand because of the greater flexibility renters have to relocate elsewhere to find employment.
Rents have further to fall yet because of the time lag between the commitment to start an apartment project and its completion. This ensures that the supply of new rental stock will continue for some time yet despite the cheaper rents now being offered. The reality is that recent new investors in the Canberra property market are likely to be locked into their investments for a considerable time until population growth helps reduce the oversupply of properties.
This downturn in property markets has been a long time coming and is likely to have caught out investors who did not closely consider the risks involved. Borrowing large amounts of money adds to the risk of any investment and especially with property assets there are many financial institutions prepared to help with the funding.
Because of the requirements to take out mortgage insurance where large loans as a percentage of the value are involved, the risk of loss falls primarily to the investor. The message for all geared investors is to consider what losses may happen if things go wrong as appears to be happening at the moment for some property investors.