How monitoring the rental market could be an early indicator of potential capital growth in flat markets

When there is no growth in an area, investors are afraid to step into that market fearing that they would have no future growth into the area. However, there is opportunity in these markets as they have the potential to boom after being dormant for so long. So how does an investor confidently step into these markets at the right time?

The key lies in observing the rental market trend or the vacancy rate of that region. Here are three examples of markets which remained dormant for years before they boomed. However, there were lot of early signs in the rental market before the pressure moved onto the sales market. Reading and interpreting these signs correctly is the key to stepping into these markets at the correct time.

1. Adelaide

The Adelaide market had no growth since 2010. There was no price pressure on houses and they remained stagnant for a long time.

Source: SQM Research table 1 – vacancy rates – Adelaide

In 2017, the first sign of change emerged. The vacancy rate started dropping from a peak of 2 per cent. The number of properties available for rent also started reducing.

This was followed by rents starting to pick up from January 2020 onwards (table 2).

Source: SQM Research table 2 – rent growth – Adelaide

This meant that demand for properties in the area was changing. As more tenants moved into the area either for job opportunities, lifestyle factors or simply because of affordability, more pressure was created in the real estate market. As rental stock reduced and rents increased, the natural tendency was for people to buy into the area.

This is clearly reflected on the Adelaide listing volume chart below (houses only). Properties on the market for longer period of times were getting purchased quickly, reducing the overall total listings on the market.

Source: SQM Research table 3 – listings on the market (houses) – Adelaide

Listings on the market started dropping from January 2020 onwards (table 3) around the same time rents started increasing. This started placing pressure on the sales side of the market.

House prices then started to increase rapidly from May 2021 onwards (table 4). Adelaide then went through a boom, wherein house prices increased by 40 per cent on average.

Source: SQM Research table 4 – Adelaide property prices

The boom in Adelaide started in 2021. But since 2017, as you can see from the above charts, things had been changing in Adelaide. The best time for an investor to have entered this market would have been in 2020, when rents were starting to increase and listing volumes were starting to reduce.

2. Hobart

A very similar pattern can be observed in Hobart. Hobart was a market with no price movement since 2007. Hobart boomed in August 2016. However, the below changes started occurring way before 2016.

• Vacancy rates started dropping from May 2013 from a peak of 2.4 per cent (table 5)
• Rents started increasing from June 2015 (table 6)
• Listing volumes started to reduce in 2014–15 and continued to drop as demand started soaking up stock quickly (table 7)
• Prices started surging from August 2016 (table 8)

Source: SQM Research table 5 – vacancy rates – Hobart

Source: SQM Research table 6 – rent growth – Hobart

Source: SQM Research table 7 – listings on the market (houses) – Hobart

Source: SQM Research table 8 – Hobart property prices

3. Brisbane

Between 2010 and 2020, Brisbane had slow growth. Prices were moving up but at a slow rate. The below changes started occurring from 2017 before Brisbane boomed in June 2021.

• December 2017 vacancy rates started dropping from their peak of 3.9 per cent (table 9)
• Rents started increasing from November 2020 onwards (table 10)
• Total listing volumes started reducing from November 2020 (table 11)
• Prices started surging from June 2021 (table 12)

Source: SQM Research table 9 – vacancy rates – Brisbane

Source: SQM Research table 10 – rent growth – Brisbane

Source: SQM Research table 11 – listings on the market (houses) – Brisbane

Source: SQM Research table 12 – Brisbane property prices

As you can see from the charts above, the first changes occurred when there was a shift in the demand-supply equation that eventually led to price growth. This means that it is very much possible to predict a market boom before it happens just by monitoring certain data indicators closely.

By understanding the principles above, investors could very much predict market booms before they occur and get full exposure to a market’s growth cycle by entering at the correct time.

Jathu Srikanthan is a buyer’s agent at Property Framework Buyers Agency.