2023 Real estate review: market shifts and insurance impacts

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I’m reminded of an ancient Chinese curse that reads: “may you live in interesting times”.

The past couple of years have certainly been interesting for the property and insurance industries.

And 2023 has been no exception!

Here are 10 snippets from the highlights reel of the biggest changes in real estate this year – and a note about the impact on insurance..

Record low vacancies

Throughout the year, the vacancy rate has hovered around one per cent.

The September quarter saw the vacancy rate reach a record low of 1.1 per cent (according to CoreLogic) – the lowest level since early November 2012.

With less than 33,000 residential properties available across the nation in November (according to SQM Research), there is an acute shortage of rentals available.

In fact, Australia needs a further 70,000 rentals to balance the market (according to Domain).

Insurance note: If you have properties on your rent roll that have been vacant for an extended period (while unlikely to be due to market forces and more likely to be a case of either the owner choosing to leave the rental vacant for some reason, or circumstances such as major repairs being required), be sure to check in with the landlord insurance provider. Most insurance policies have conditions or may be void once the property has been vacant for an extended period (it varies between insurers but for EBM RentCover it’s 90 consecutive days) and arrangements will need to be made to keep the property insured.

Rents reach new highs

In the September quarter, the national median asking rent for a house hit $600 a week – up more than 13 per cent over the year, while across the nation’s combined capitals, the cost of renting a unit was the same as renting a house – $600 a week – after prices rose almost 24 per cent over the year (according to Domain).

By that third quarter of the calendar year, national rents had risen for 38 consecutive months, taking rents 30.4 per cent higher than in July 2020 and adding the equivalent of $137 to the median weekly rent (according to CoreLogic).

Insurance note: If your landlord has increased the rent, it’s important to make sure the documentation is also updated. This includes advising the landlord insurance provider of the increase. Any loss of rent payout is likely to be based on the documented rent, so it pays to make sure the paperwork is up-to-date. Also be sure to check that the asking rent doesn’t exceed the maximum rent that the insurer covers (at EBM RentCover that’s $1500 per week). If it does, negotiation with the insurer will be needed.

Home price recovery

Following incredible price growth in 2021, house prices took a dive in 2022, and began recovering in 2023.

Property market commentators (including Domain, PropTrack and CoreLogic) expect house prices to fully recover by the end of this year.   

Insurance note: It’s important to remember that when it comes to the sums insured component of a building insurance policy, the nominated figure needs to be based on current rebuilding and replacement costs – not market value. Policyholders should check the reinstatement costs before looking to adjust their insurance.

Cost of living crisis

Between rising interest rates, low wages growth, high inflation and higher costs for homeownership and renting, both landlords and tenants can be doing it tough.

While many landlords have increased rents, some have not been able to lift rents high enough to cover the increase in mortgage payments.

This is leading to many leaving the market.

For tenants, rental affordability can bite hard (REIA figures showed the proportion of income required to meet median rent nationally increased to 23.3 per cent in the June quarter) – leading to rent arrears.

Insurance note: Loss of rent is the leading reason why landlords need to claim on their insurance. And it’s usually only with a specialist landlord insurance policy that the tenant-related risks associated with owning an investment property – such as loss of rent and damage caused by tenants – are covered. Be sure that your landlord clients have the right landlord insurance for their property and leasing arrangement.

Exodus of investors

According to some property pundits (including PIPA and Digital Financial Analytics), a combination of high interest rates and restrictive government actions when it comes to property investment has led to thousands of rental properties being taken off the market.

Insurance note: If your clients have taken their property off the rental market, they need to re-assess their insurance cover. It’s important to understand that landlord insurance is designed specifically to protect against the risks associated with investment properties. If the property is no longer leased, or available for lease, then a landlord policy is unlikely to be suitable and alternative insurance should be sought. In addition, the landlord may be eligible for a pro-rata refund if they cancel their policy. 

Building activity remained subdued

The building industry continues to be impacted by supply chain disruptions, labour shortages, high materials prices, a spate of builder insolvencies, and macroeconomic conditions that are impacting demand (financing) for new builds, despite forecasts of an acute housing shortage looming thanks to a growing population. 

Insurance note: Owners building new homes are generally covered by builders’ warranty insurance. The insurance covers a builder’s client for loss of deposit, failure to start or finish a job and defective work on a completed job. It’s important to note that building defects are not usually covered in landlord insurance policies (or any building policy for that matter) and, if there are issues with the building, these need to be taken up with the builder.

Short-term in government sights

In the face of a worsening rental crisis, many governments and others have turned their attention to the short-term market.

According to REIA, the number of Australian properties available as short-term rental accommodation shot up 22.8 per cent in the past 12 months.

It also found that, of the 134,000 short-stay places on offer, 82 per cent were suitable for transition to the long-term market.

The transition is something several governments have looked into, including in Victoria where a levy on short-term rentals is being introduced, and in WA where owners are being offered $10,000 as an incentive to switch. 

Insurance note: If your landlords are looking to switch to the long-term market, they may need to switch their landlord insurance too. There are different policies to suit the different letting scenarios and, as the cover is different, it’s important that the right policy is chosen.

Legislative changes

The year has seen new tenancy laws come into effect and be proposed across several jurisdictions.

Some of the key changes include making it easier to rent with pets (Queensland, WA, SA and NSW); a ban on rent bidding (NSW, ACT, WA, Victoria and SA); limiting rent increases (Queensland, WA and NSW); ending no grounds evictions (Queensland, ACT, SA and NSW); minor modifications (ACT, WA, SA and Queensland); changes to bond schemes (SA, NSW,WA and Queensland); and minimum standards (Victoria, ACT and Queensland).

Insurance note: Changes to legislation can impact insurance cover and claims – both in terms of policyholder obligations under law and under cover, and in what can be claimed. For example, if a policyholder doesn’t meet minimum standard obligations, any claim may be reduced or even denied. Or if legislation allows tenants to make modifications, a claim for intentional tenant damage may not be valid. With renting with pets now enshrined in just about every jurisdiction’s tenancy law, landlord insurance with pet damage cover is wise (most EBM RentCover policies offer up to $70,000 cover for pet damage).

Crack down on rent bidding

Competition for any available rental has reached fever pitch.

Desperate prospective tenants are resorting to offering above the asking rent to try to secure a home.

While the various jurisdictions are cracking down on agents and landlords soliciting rental bids, some (like Victoria) are also making it an offence for tenants to engage in the practice. 

Insurance note: Being protected by landlord insurance is conditional on the policyholder (and their contracted representatives) acting within the law. If the policyholder has acted outside of legislated requirements, they could find any insurance claim denied or their policy cancelled.

Focus on disaster zones 

With the frequency and severity of natural disasters increasing, governments, the property industry, the building and construction industry, insurance industry, emergency services, and other associated and impacted fields are intensifying their focus on disaster mitigation.

One course of action is governments at all levels reassessing planning and development in disaster-prone areas, specifically in high-risk flood zones.

A recent decision by the NSW Government to stop developing homes in flood-prone areas of Sydney’s north west was welcomed by industry bodies including the Insurance Council of Australia (ICA).

Insurance note: Following the devastating floods along the east coast in March 2022, which the ICA notes are the costliest insurance catastrophe in history (with insured losses of $5.87 billion), the insurance industry continues to assess the feasibility of insuring property in flood-prone areas. In recent years, a number of insurance providers have ceased to offer flood cover for high-risk properties, while others have lifted premiums to levels that are often financially untenable for policyholders. As the final costs of the most recent flood events are tallied, more insurance providers, including EBM RentCover, are changing the way they insure high-risk properties.  

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This recap of some of the key changes to the real estate industry over the past year serves as a reminder that landlord insurance is a valuable investment for property owners.

It also reminds us that ‘set and forget’ is not an option either.

Keeping up-to-date with what’s happening in the market and industry is key to keeping your landlord clients properly protected.

If you have questions about our policies, please talk to your EBM Relationship Manager.

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