Understanding Rental Income Fluctuations
This article was provided by
Simon Harris – Managing Director of National Buyers Agency, Providence Property Group
For decades now, owning investment properties has been considered by most Australians as an outstanding means of building wealth and long-term security.
And for good reason.
Property markets in Australia have enjoyed moderate (and in some cases, dramatic) long-term growth over the past 50 years, which have provided excellent returns for countless investors.
What’s more, many have taken advantage of generous tax deductions – including from negative gearing and depreciation, which can reduce the amount of tax you pay on earnings at tax time.
With the exception of a black swan events (described below), Investors should expect some fluctuations in the rental yield of their investment property – it’s normal. Ultimately, the most important thing investors can do to shield themselves against fluctuations is to invest wisely in the first place.
Why Rental Income Fluctuates?
Interestingly, the weather is one of the biggest influencers of rental demand. According to a study conducted by realestate.com.au, data shows that demand for rentals drops at the start of winter and recovers before spring. This is particularly true of beachside suburbs.
Both June (winter) and December are generally the easiest months to find a rental property, according to realestate.com.au, with less demand, there can be downward pressure on prices.
Meanwhile, rental properties in suburbs close to universities can also experience fluctuations depending on the time of the year. During university breaks, demand often peaks, whilst throughout the semester, it plateaus.
Other factors which can impact rental returns include the economy of the town or suburb where the property is located – for example, an emerging or existing major business or industry in the area, such as mining can drive demand up or down. How scarce similar rentals are in your area is also another major factor. You can safeguard against this often short-term effect, by buying in a suburb with low vacancy rates and by checking with the council on the number of new development applications in the pipeline. Another potential impactor includes the holiday season – availability of lease options via websites like Airbnb can create upward pressure on rentals when there are fewer long-term options on-hand.
Now, let us talk about COVID-19
The restriction on International and even interstate travel has no doubt introduced varying levels of risk as a result of this black swan event. A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
Australian State and Federal Governments were quick to react to the COVID-19 situation affecting landlords and tenants nationwide with a range of stimulus offerings.
These stimulus offerings are welcome by both tenants and landlords. While landlords are understandably focused on rental income they should also ensure they’re claiming every available tax deduction.
Even if your investment property is vacant, you’re still entitled to claim tax deductions like depreciation. You just need to be actively looking for tenants and not placing unreasonable demands on them.
Demand for investment properties due to population growth has decreased. Morrison Budget documents reveal the federal government expects the rate of growth to fall from 1.2 per cent last financial year to 0.2 per cent this year, and then 0.4 per cent next year, the slowest growth in a century.
Population growth usually sits at about 1.7 per cent. About two-thirds of that is from immigration and the rest is from natural growth. Typically we see approximately 240,000 net immigrants entering Australia each year. For 2020 the government is forecasting that to be negative 70,000.
The international student accommodation sector has also seen a downturn. International education was worth $37.6 billion to the Australian economy last year, but continued border closures are putting that at risk.
According to the Australian Bureau of Statistics, there are more than 500,000 international students in Australia; many of whom have lost their jobs during the pandemic. International students are not eligible for the Government’s JobKeeper or JobSeeker programs.
In May 2020 The NSW Government announced it will fund temporary crisis accommodation for stranded international students, up to 20 weeks’ of free accommodation; this service will be delivered through approved student accommodation or homestay providers. The $20 million package includes a temporary housing scheme delivered through approved student accommodation or homestay providers.
The support service will offer free advice and information about other measures, including the moratorium on rental evictions and medical, mental health, legal and emergency support.
The Key Takeaway
Choosing an investment property that will be ‘ever-green’ in its appeal to renters – through factors such as location, style, and features will help ensure consistent results. Your rental will do best when viewed in the long-term.
Disclaimer: This article does not take into consideration your personal circumstances or a particular property, it is general in nature and should not be considered as advice.