Who will blink first – property investors or renters?

There is a very serious game of financial chicken being played on Australia’s property market at the moment.

In one corner are the millions of renters – all of whom are facing, at a minimum, steeply rising rents and incredible uncertainty about what the future holds.

And on the other side are potential landlords, who deserted the rental game in droves during the pandemic, in many cases selling out of rental properties which had undergone tremendous capital gains.

What has been remarkably absent from the property market since prices began to fall and interest rates began to rise is new rental property buyers in the market.

Rising rents should be a big attraction

If anyone could make hay in the falling market, you would think it would be property investors who can negatively gear their interest payments and at the same time benefit from rental increases that have literally been startling.

With rental vacancy rates falling to incredible lows right across the major Australian cities and large queues forming outside any property for rent, you would think this is the perfect time for property investors to start to buy up.

So far, though, they have been suspiciously absent from the market, which is why those selling property have largely been slanting their advertising towards owner occupiers – and those desperate renters who are struggling to find anywhere to live and are now trying to join the ranks of the mortgaged instead.

Australian Bureau of Statistics figures for the year to September showed that investor lending is down a whopping 15.3%, with investors perhaps prepared to sit on the side lines and wait until interest rates have stabilised before they jump on properties that have fallen quite sharply in value but might still have further to fall.

Higher rates could be scaring off investors

It is perhaps this uncertainty about the future path of interest rates and also property prices that has perhaps driven so much caution among property investors.

There might also be a few other factors holding them back, with many states increasing regulations about things like pets and taxes on property investors which have arguably swung the pendulum back towards renters a smidgeon.

Perhaps getting a bank loan has become more difficult at the same time that interest rates have risen, and income tests and loan buffers have been tightened.

However, it would be hard to argue that this is a really bad market for property investors when you compare it to many offshore markets in which renters have substantially more rights than in Australia.

At some stage, you would expect the heady cocktail of rapidly rising rents, tight vacancy rates and falling prices to attract a horde of starry-eyed investors, eager to follow the investment adage of buying low and selling high and taking advantage of rocketing rents.

Renters have faced a perfect storm

That time probably can’t come quickly enough for potential renters, who have faced a perfect storm of forces since the pandemic lockdowns ended and students and immigrants began to return to a rental market that was already incredibly tight.

With household sizes falling as former renters who had returned to the family home to wait out the virus decided to move out again, incredible competition for scarce rental opportunities has seen many forced into offering above market rents to secure a property.

There has rarely been a time when vacancy rates have been so low and the supply of potential new rental apartments seems fairly constrained as well.

Inflation could be causing investor caution

Inflation may also be playing a part on both sides of this game of financial chicken, with rents rising faster than inflation for the struggling renters but inflation also bumping up the costs of a range of inputs for landlords, including council rates, insurance, owner’s corporation bills and water rates.

Perhaps there is only so much uncertainty a property investor can live with, as increasing costs and interest rate uncertainty outweigh the undoubted attractions of a tight rental market and rocketing rents.

As soon as there are signs that either interest rates or inflation or hopefully both are starting to stabilise, you would expect some of these property investors to hopefully bite the bullet and buy a rental property.

So, the game of financial chicken looks set to continue for a while, with property investors sitting on the sidelines looking for the perfect time to pounce and renters in a world of pain as they navigate an incredibly tight market or wait in dread for the latest rent increase.