Weekly rents are becoming increasingly unaffordable – great news for land lords but grim news for renters.

While the low level of affordability associated with purchasing a home has been well document, rental affordability has largely flown under the radar. Rental rates have increased significantly over the last five years. Three years ago the average Sydney house could be rented for $261/week. In today’s tight rental market the average weekly rent has risen by 25% to $495. Nationally the rise has been even more dramatic with the average weekly rental rate for a house up by one third over the last three years.

The most extreme example of rental increases is Darwin where the average weekly rent on a house has increased by 70%; from $323/week back in 2005 up to $551 this year.

Rental increases are great news for landlords: the returns on investment properties have improved markedly in recent times. For renters, however, the news is grim. Increasingly renters are stuck between a rock and hard place. Often renters lack the funds to purchase a home and the current trend of increasing rents suggests it will soon be almost equally as difficult to afford the weekly rent.

Housing affordability for owners is now improving due to the recent slashing of interest rates and to a lesser extent the declines in property values. On the flipside, housing affordability for renters is likely to deteriorate further due to strong demand for rental properties and very low vacancy rates.

Across the capital cities, vacancy rates are now at 3% or below (according to the REIA). Sydney and Melbourne are both recording vacancy rates around the 1% mark and Brisbane has a vacancy of 1.7%.

So where can renters still find a bargain? The tables included in this release highlight the top five most affordable suburbs for median weekly rental rates in each of the capital city metro area.

Throughout the metro areas of Australia, the Melbourne suburb of Millgrove has recorded the least expensive rent for houses. The average house at Millgrove, which is located in the Yarra Ranges council area, rents for $185/week.

The most affordable suburb for renting a unit is Adelaide’s Elizabeth Vale where the average rental rate is just $155/week.

The most affordable rents, not surprisingly, are generally located within the outer ring suburbs of the capital cities; mostly outside the 20km ring. While the affordability of these areas is attractive, many renters are preferring to live closer to the city or closer to efficient transport solutions. For this reason vacancy rates are generally lower and rental increases tend to be higher within the inner city suburbs and transit oriented precincts located away from the city.

Stamp duty hurts Sunshine Coast home buyers

The state government has been labelled a bandit after it was revealed Noosa, Caloundra and Maroochydore homebuyers are paying the highest stamp duty rates in Queensland relative to household income.

Noosa topped the table with its stamp duty as a percentage of household income pegged at a staggering 17% this year in the Bankwest residential stamp duty report.

On average, Caloundra and Maroochydore home buyers paid 13% of their annual income on stamp duty.

The median stamp duty bill for Noosa, Caloundra and Maroochydore homebuyers in 2008 was $9520, $7337 and $7665 respectively.

The stamp duty bill for the three is more than double the state average.

The real estate industry has called on the government to ease the financial burden for people buying properties on the Sunshine Coast.

Stewart Tandy and Associates principal Vicki Stewart said stamp duty rates on the Coast were “criminal”.

“Something has to be done about it,” she said.

“The government has had a dream run over the last six or seven years with stamp duty and it’s now payback time – it has to start giving back a bit.”

Across Queensland, the median stamp duty bill is $5,005.

Over the past five years it has increased 151% from $1,995, with the median stamp duty bill now equal to 7% of household income. It was 4% in 2003.

Treasury was unable to supply a breakdown for the Coast.

While the federal government has been applauded for its first homebuyers’ grant, in which the stamp duty is waved on properties up to $500,000, agents said stamp duty rates across the board needed to be urgently addressed.

“We’re all paying the price for prime lending,” Ms Stewart said.

Agents said high stamp duty bills and other costs associated with buying a home had sidelined many prospective homebuyers, with a growing number of people deciding the renovate their existing home rather than buy a new one.

“No doubt it’s an inhibitor when people think about a property transaction,” Ray White Maroochydore principal Brett Graham said.

Real Estate Institute of Queensland chairman Peter McGrath said while Queensland had the lowest stamp duty rates in Australia, more could be done to help homebuyers.

“In today’s economic climate there is still room for stamp duty, particularly at the higher end, to have some reductions made,” he said.

The Reserve Bank has slashed interest rates to a seven year low and there is more to come!

The aggressive cuts in interest rates from the Reserve Bank have virtually eliminated six and a half years of rate increases in the space of five months, bringing the official cash rate back to levels not seen since May 2002. Such a dramatic cut in interest rates has not been seen in almost 20 years.

The latest cut takes the official cash rate down to 4.25% and the average standard variable home loan rate is likely to fall to between 6.8% and 6.9% considering the Commonwealth Bank of Australia and National Australia Bank passed on the rate cuts in full.

The good news for mortgage holders, or those looking to buy into the property market, is that rates are set to go even lower. The financial markets are factoring a 90% expectation that rates will fall another 100 basis points after the February RBA board meeting.

The Sydney Futures Exchange (SFE) is indicating a particularly bullish assessment of how low interest rates may go. The yield curve for 30 day interbank cash rate futures is showing the official cash rate could fall as low as 2.8% by the middle of next year. Most of Australia’s leading economists aren’t quite as bullish, suggesting the official cash rate will bottom between 3.0% and 3.5% by mid-2009.

Over the last ten years the average standard variable mortgage rate has been about 1.8% higher than the official cash rate. More recently the difference has risen to about 2.65%. So, with the official cash rate likely to bottom around 3.0% we can expect the average standard variable mortgage rate to go as low as around 5.6% by the middle of next year.

Since interest rates peaked back in July there has been an annual saving of approximately $8,100 per annum on the interest component of a $300,000 mortgage – that’s more than $150 per week. Together with the declines in home values recorded since the beginning of 2008, the net result has been an improving level of affordability. 

In all likelihood it will be the first home buyers segment that takes the most advantage of affordability improvements and it is likely to be this market segment that shows the first signs of any recovery. Demand has been building amongst these buyers and the recent falls in interest rates together with the doubling and tripling of the first home owners grant is improving affordability levels amongst this group of buyers. The latest housing finance statistics from the ABS shows that first home buyers as a proportion of all buyers are at their highest level since March 2002.

Anecdotally we are already seeing a lift in activity amongst the lower priced segments of the market after the doubling and tripling of the first home owners grant together with the previous rate cuts. To date though, we are yet to see this increased level of market activity translate into actual buying behavior. It is likely the latest cut will provide further encouragement for buyers to venture back into the market; however we are not likely to see an increase in sales figures until first quarter ‘09, as the market normally remains quiet during the Christmas and New Year period.

The most significant obstacle is still the fact that consumer confidence remains very low. Consumers are still very cautious about future economic condition which means potential buyers are still hesitant about venturing into the market. The largest concern is likely to be job security, with unemployment expected to rise over the coming months.

Interest Rates cut by 1 per cent

The Reserve Bank has slashed its key interest rate by more than expected in its latest effort to prevent the economy from sliding into a recession.
 
The central bank lopped a full percentage point, or 100 basis points, off its key cash rate, reducing it to 4.25%.

That level matches its previous record low – reached in the wake of the September 11, 2001, terrorist attacks in the US – since the RBA began targeting rates about two decades ago.
 
The bank joins the Federal Government in attempting to avert a sharp slowdown that would snap 17 years of growth for the economy

The cut marks four months in a row of reductions, as the central bank tries to shield the domestic economy for a global slowdown.
 
Economists predicted the RBA would lower rates by only 75 basis points.

All up, the central bank has chopped 3 percentage points from the key rate since September, when concerns about a recession began to overshadow inflation concerns.

For a typical 25-year, $300,000 home loan, today’s cut if passed on in full by lenders will save borrowers about $193 a month in payments or $58,000 over the life of the loan.
 
Commercial lenders are under pressure by Canberra to pass on most if not all of the rate reductions to customers.