Oversupply increases in Sydney rental market

Even if doom-and-gloom headlines suggest that the markets in Sydney and Melbourne are set for more than a 10 per cent decline, Mr Tarrant and his team believe that the softening market will not have a significant effect on their portfolio, especially considering how some of the areas they invested in even saw growth recently.

Moreover, the investor plans to hold his properties for the long term, which gives them enough time to recover from any losses and ultimately enjoy capital growth.

According to his buyer’s agent Steve Waters: “Sydney, in particular, has reset a little bit. There might be a little more resetting or consolidation in price because I truly think that the last couple of years have seen Sydney growth go beyond where it should have been.”

“This contraction is bringing it back to where it should be,” he highlighted.

Mr Waters advised investors to focus on cash flow management instead, which will enable them to stay in the market for as long as they can realise their goals.

‘Slow downward, slow upward’ trend

Despite having certain areas bucking the downward trend, Mr Waters encourage investors to avoid letting their guard down. Instead, these market fluctuations should inspire more thorough processes for due diligence.

Even if capital growth potential has been relatively good across the market, interest rates continue to rise, affecting investors’ mortgage repayments and ultimately putting a dent on their cash flow.

Moreover, the huge increase in construction has also led to a softening in the rental market.

In a recent market intelligence presentation by CoreLogic, all major capital markets are reported to be going up or holding steady over the past year except for Sydney and Melbourne, which continue to go south.

Mr Waters said: “It's going to be a slow downward trend but there's going to be slow upward trend as well. That cycle's going to be a couple years down, a couple years up.”

“I also think that there'll be markets that buck the trend, so to speak. Sydney is in for that softening phase, not just in terms of capital or equity growth, but also from a cash flow point of view, particularly rents,” the buyer’s agent added.

Rental market fluctuations

While the Sydney property market may rise in the future like other major capital markets, its current conditions indicate that it is still very much a softening market.

The fundamentals that drive growth into the market may have been improving in Sydney, according to experts, but the fluctuations in property values and rental rates continue to affect the growth in real estate investments across the city.

Often, when property values increase, rental rates are expected to go up as well. In contrast, the property values in the NSW capital continue to increase while rents tend to soften due to the imbalance in the city’s supply and demand for dwellings.

The Hills District, for instance, has seen a major increase in investment activity over the last five years, but data shows that vacancy rates in the area are sitting at a big 7 per cent.

According to Mr Waters: “While immigration and population growth within Sydney very, very healthy, so too is the amount of construction that we've had over the last four or so years—you can build a lot quicker than the population grows.”

“Even though there's a lot of people moving out to that area, we're starting to see that in other areas throughout Sydney, the rents are coming off, which is what we have modelled and we allow for. However, we're also seeing the price decline as well,” he added.

The buyer’s agent advise investors to reassess the market and, if necessary, be willing to sacrifice to avoid a significant decrease in their cash flow.

At the end of the day, it is better to lower the rental rates by $10 to $20 than to suffer the consequences of a four-week vacancy.

“This is where investors really need to be on the ball and involved in their portfolio,” Mr Waters highlighted.

Despite the softening market, he encouraged investors to take a long-term approach when investing in Sydney instead of opting to sell off their properties. 

After all, the fluctuations that influence Sydney’s current market conditions are experienced by most property markets in every cycle—simply ‘history repeating itself’, according to the buyer’s agent.

Given the robust economy across the country as well as healthy finance environment, investors need not worry about an unprecedented rise in vacancy rates or a total crash in the property markets, particularly in Sydney, which has long been widely considered a world-class city.

Tune in to Phil Tarrant's latest portfolio update to know more about how he and his team of experts will navigate the ever-changing property investment landscape in Australia.