Sydney’s supply of rental homes has been shrinking in the first month since the Labor government announced landmark capital gains tax and negative gearing reforms in the federal budget.
Exclusive data from property analytics group FoundIt has revealed a drop in the number of new landlords entering the market, coupled with continued property sales from existing investors.
New purchases were well below the rate of rental home sales, which meant Sydney had fewer rental homes than before the changes were made, with experts revealing rents were likely to continue rising.
There were close to 2,159 rental bedrooms added to the Sydney market over May, which was well below the 3,744 rental bedrooms that were lost through sales.
Sydney-based investors Victor and Reshmi Kumar said the reforms would discourage them from selling, but it would also make it harder to buy.
FoundIt head of research Kent Lardner said rental supply in much of the country was already shrinking before the Budget changes were announced and the trend would accelerate in coming months.
The changes included negative gearing benefits being restricted to newly built homes and the previous capital gains tax discount being replaced by an indexation system tied to inflation.
Mr Lardner noted that sales of investment properties were down on previous years but the rate that they were being replaced by new rental stock was slowing as new investors dropped out of the market.
“Fewer new rentals are being cycled back into the market,” he said. “Now, especially in established areas, if a rental is sold. It’s not being replaced.
“This has meant a loss of rental stock. Vacancies are already tight in most areas and the result is that rents will continue to rise.
“There will be many suburbs where rental stock may become so tight that many tenants will be pushed out of their area simply by there not being enough rental homes.
“Those homes that are available will be taken by the tenants with the deepest pockets.”
Parramatta has been shedding rental stock.
FoundIt revealed Sydney’s inner city and Parramatta area were losing rental stock the fastest.
There were 137 rental home sales in the inner city and 75 in Parramatta, which meant the “loss” of 244 and 169 bedrooms of rental accommodation, according to FoundIt.
The sales came at a sensitive time for these markets given apartment rents had already climbed by an average of $50 a week in the inner city and $30 a week in Parramatta over the past year.
Other areas with a higher incidence of investor sales were North Sydney-Mosman, Blacktown, the eastern suburbs and Ryde.
Victor Kumar, a Sydney investor, said bank changes driven by the negative gearing reforms would be a significant drag on the rate of new rentals coming to market.
Mr Kumar pointed out that many lenders had already accounted for the loss of negative gearing benefits in their assessments of investors’ borrowing power.
FoundIt head of research Kent Lardner said the replacement rate of sold rentals was slowing.
Most banks were reducing the amounts they would lend investors by about 20 per cent, but with some major banks it was nearly 40 per cent, Mr Kumar said.
“With these changes that are going to come through it’ll significantly constrain lending and it already is starting,” Mr Kumar said.
Refinance.com.au broker Aidan Hartley said an investor having 20 per cent of their borrowing power removed would push most new investors out of the market.
Nathan Birch, a buyer’s agent and the director of property management firm Blink, said the negative gearing changes would exacerbate current rental shortages.
Mr Birch said rental demand was continuing to increase due to still high immigration intake, which meant that slowing the supply of new rentals would eventually drive up tenant competition.
“It just means (existing) landlords can increase their rent,” he said.
Reforms on negative gearing were motivated as necessary to make it easier for first-home buyers but increases to rent may make it harder for some buyers to save. Picture: Asanka Ratnayake
Mr Lardner said Treasury’s announcement in the budget that it would restrict negative gearing to only newly built homes from mid-2027 was unlikely to dramatically boost new home sales.
It was also unlikely that having fewer investors competing for homes would make it easier for renters to become first-home buyers because many lacked the borrowing power and deposit needed.
“If the intent is to make more renters first-home buyers, they have to be able to afford the deposit. How many can do that?
“The reality is that the trend line for wages has been very poor for years, but rents have continued to go up. This has made it harder for renters to become first-home buyers.”
Having fewer rental homes at a time of growing rental demand would be a “disaster”, Mr Lardner added.
“We haven’t even seen the tip of the iceberg,” he said.
“Many of new (rental) purchases in May would have been from transactions that predated the Budget. Since then, there is much less of an incentive for new investors to buy.
Blacktown has also been losing rentals.
“Taking away negative gearing and the capital gains tax discount has meant a property would need to have high rental yields to be enticing for a new investor. Most suburbs don’t have that.”
– With additional reporting by Kaylee Cranley
SYDNEY AREAS THAT LOST THE MOST RENTALS OVER MAY
| SA3 | Lost beds | Annual house rent rise | Annual unit rent rise |
| Sydney Inner City | 244 | $70 | $50 |
| Parramatta | 169 | $55 | $30 |
| North Sydney – Mosman | 145 | $175 | $70 |
| Blacktown | 142 | $20 | $20 |
| Blacktown – North | 134 | $40 | $30 |
| Eastern Suburbs – North | 131 | $100 | $70 |
| Gosford | 131 | $55 | $75 |
| Ryde – Hunters Hill | 129 | $150 | $55 |
| Penrith | 126 | $35 | $20 |
| Strathfield – Burwood – Ashfield | 124 | $65 | $40 |
| Ku-ring-gai | 115 | $50 | $70 |
Source: FoundIt
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