What rising construction costs and declining vacancy rates mean for investors

May 18, 2022

So much has been happening over the past 12 months in the economy and across the globe from a political and social perspective. We have hit a record low for vacancy rates across the country, we’re witnessing sky-high construction costs and the demand for residential stock is far outweighing supply. While this time poses friction and frustration for some, it also presents opportunities for savvy investors. 

The current environment 

While we experienced a mass exodus of internationals and a halt on travel throughout 2020 and 2021, leaving empty houses and apartments and soaring vacancy rates, the coin has flipped in the past six months as the world began to open back up. 

With people flooding back into the country and Australians adapting to their new lifestyles, we’re now seeing the rental market bursting at the seams. There is a critical undersupply of rental properties and it is only continuing to decline. Renters are now desperate to get a foot in the door with many offering well over the asking price. 

This limited supply and ever-surging demand means that vacancy rates are at a record low. Depending on which region of Melbourne or Victoria you’re in, the vacancy rate is just under 2 per cent. In other parts of Australia, it is hovering around 1 per cent. 

Limited construction resources in Australia are playing a key role in this predicament, as it is becoming exceedingly difficult for developers to get new properties off the ground. International affairs such as the Covid zero policy in China, the political climate in Russia and the war in Ukraine are impacting the importation of materials such as treated timber products. Residential projects that were previously approved are no longer feasible to complete, and labour and skills shortages across Australia are compounding the issue for developers. The amount of planned stock coming to market is rapidly declining.  

What this means for investors

With the recent announcement of rising interest rates across the country, some investors are looking at this perfect storm of ‘critical supply and demand’ within the property market as a way of hedging against the rising cost of living and maintaining pace alongside it. 

With the interest rate hike comes a wary market sentiment that is forecast to push property prices down as buyers sell. Tight rental markets, the prospect of higher yields and long-term capital gains are providing an opportunity to make the most of a cooling market. 

We see an opportunity for what is known as a ‘counter cyclical purchase’ – capitalising on the downswing and cashing in on a great deal from those who are getting out of the market. 

If this is something that you are interested in taking advantage of, it is important to do your research. For off-the-plan purchases, the right questions need to be asked to ensure you are aligned with a trusted developer who can deliver on the project.