How Economic changes are impacting landlords
There is no doubt that it has become more challenging and costly to be a landlord in the current economic environment. Compounding pressures of interest rate rises, inflation, downward trending house prices and more stringent bank lending criteria is not making things easy for landlords at the moment. Recent changes in legislation to remove interest deductibility, the ‘bright line’ capital gains test, and costs associated with healthy homes compliance has put further challenges.
Many landlords have relied on capital appreciation and strong positive monthly cashflows especially in the last few years, but now that house prices are beginning to fall in most places – down 5% or 6% so far and forecasting to drop up to 20% once adjusted for inflation – this is no longer a guaranteed strategy.
The national average gross property rental yield is now just 2.6%, versus the average standard two-year fixed mortgage rate of 5.6%. CoreLogic’s chief property economist Kelvin Davidson says in this environment, it will be no surprise to see investors focusing on rental return or yield. The negative yield gap of -3% is the largest since mid-2010 - in other words, the least favourable position for property yields versus mortgage costs for more than a decade.
To make a property earn its keep, a landlords will need to find something where they can add significant value, or achieve a particularly strong rental return. The problem is that these types of opportunities are few and far between. Many landlords will choose to sit on the side lines and wait for better buying opportunities to appear down the track.
Despite the economic uncertainty there are things landlords can control to manage their risk in these uncertain times. These include:
A focus on cost control
Ensuring your property is maintained and attractive for tenants
Ensuring the rental is a fair market price and not too high will be also important to ensure full occupancy
If you have any questions about the best way to manage your property in these challenging times, contact us at Just Property Management.