As one of the most influential and respected scientists of all time, Sir Isaac Newton, famously said:
“What goes up, must come down.”
And even though we know that Newton was referring to his theory on the law of gravity at the time, this same statement could easily be applied to the current Perth Metropolitan rental market.
Because just as we’ve witnessed rents in Perth skyrocket to historically high levels over the past few years, the latest figures received from REIWA confirm that current rental values in the region have fallen by approximately 10% on the previous year’s figures.
With the median house rental down from $450 in March last year to $400 in April 2016 and vacancy rates up to 5.7%, the rental market has continued to soften. To add to this situation, the total number of properties for rent across the Metro area has broken through the 10,000 vacancies threshold, with 10,127 properties now for rent as compared to 7090 at the same time last year.
The reason for this shift in rental returns is based upon a number of key market forces which include:
- Lower demand with less tenants currently seeking rental properties and more opting to move into the residential market to purchase, due to low interest rates.
- A marked increase in the number of rental properties available providing a wider choice for potential tenants.
- Greater competition amongst landlords for tenants in the market place.
- All of these factors combining to push rents downwards.
At Baston & Co. Property we have seen that this downward adjustment in rental prices has also been echoed across Victoria Park and the surrounding suburbs.
For Landlords who wish to avoid lengthy vacancy periods and maintain the continuity of their valuable rental cash-flow when leasing their properties in this market, there is an answer. In fact we’ve found that being responsive to the market, slightly lowering rent levels and meeting current expectations is a proven strategy which makes both dollars and ‘sense’ for Landlords over the long term.
Consider the following case study which may ring true for many Landlords in the current market.
Mr. Harman, (not his real name) is hoping to achieve the same rent levels paid by his long term tenants who have recently vacated his rental property. The rent for the older style 3×1 rear villa is set at the existing price of $390 per week.
As the rental campaign progresses there is some interest from the market, however feedback from many of the prospective tenants is that the rent is too high compared to similar properties currently available.
After a few home opens, the suggestion to Mr. Harman is that in order to tenant the property he should consider lowering his asking price based upon the viewing tenants’ feedback. The Landlord is reluctant to do so and the marketing of the property continues at $390 per week.
In the meantime, the property sits vacant, earning the Landlord $0.00 in rent as each week slips by. At the 4 week mark, the situation with Mr. Harman’s property is reviewed and again a slight downward shift in the rent is recommended by the Property Manager but not accepted.
Finally, after another 3 weeks of marketing, some prospective tenants put in an offer to lease the property at a reduced rent below the asking price. The Property Manager organises all required leasing documents and a lease is signed at $360.00 per week, $30.00 less than the original price. Ultimately the tenancy now commences after the property has sat vacant for 8 weeks.
Now let’s quickly review this scenario and consider the actual cost to the Landlord of not having his property leased for 8 weeks.
Over the 8 week vacancy period, the Landlord effectively missed out on 8 x $360.00 = $2880.00 of gross rental income.
To equate to this loss of income, he would have had to wait for a staggering total of 96 weeks before he equalled the lost income from the original $390.00 per week!
Which means that for each month that he did not respond to the market and adjust his rent level, he was missing out on rental cash-flow which could take nearly a year to make up.
On the other hand, if Mr. Harmon had agreed to meet the market and lower his rental price by just $30.00, he may have had the property leased and earning him income within a week or two.
Initially offering the property at market rental price could have resulted in more than one application, ensuring the best quality tenant was obtained.
There is the also the added bonus of spreading his potential loss over a longer period – time for the market to change and for rent reviews if warranted.
Some Quick take Home Points:
- In a softening rental market, Landlords need to recognise the long term benefits of responding to the market and slightly shifting their expectations so their properties can be tenanted and generating income.
- Tenants now have a lot of choice and Landlords need to be realistic in order to be competitive or risk sitting with vacant properties returning zero rent.
- Weigh up the real cost of not leasing your property quickly, it may surprise you.
Property Management Dept, Baston & Co. Property