Warrnambool's rental market offers property investors one of the best returns in the state but agents say new data fails to show the real picture.
Industry peak body Real Estate Institute of Victoria says investors receive on average a 5.5 per cent return on a three-bedroom house in Warrnambool.
The return is better than Wangaratta (5.4 per cent) but lower than Shepparton and Wodonga (6.2 per cent and 6 per cent).
While some Warrnambool agents paint a bright picutre, others warn returns are sliding with rising council rates and slow-growing values impacting investors.
They say a lack of properties and banks' tighter lending practises are driving investors away.
Brian Hancock from Brian O'Halloran & Co said supply was not keeping up with demand.
"We are experiencing a severe shortage of rental properties, you can get anything from 20-30 people inspecting a reasonable three or four-bedroom house," he said.
"We are seeing good returns for rental properties, but it's probably the shortest rental market I've seen in my 40 years in the industry."
Mr Hancock said growth in property values in Warrnambool had been fairly stagnant, while council rates continue to rise.
He said the result of the federal election had delivered some stability, but banks continue to tighten lending.
Fears that a Labor government would have cut negative gearing had damaged the market and investors did sell up, he said.
Mark Dwyer, from Ludeman Real Estate, said recent Victorian rule changes, such as pet ownership, had spooked some investors and was the main reason for the rental shortage.
He said property values had not moved much in the past 10 years, but over the past 12 months there had been a definite upward trend driven by demand and a lack of available properties.
He said if the shortage continued it would drive the prices even higher.
Mr Dwyer said Warrnambool City Council should be 'careful' about putting rates up.
"I can sort of understand why the council is thinking about putting rates up, but if it goes up ahead of the consumer price index it's hard for them to justify putting it up much higher than the cap," he said.
Matt Northeast, of Northeast Stockdale & Leggo Real Estate, said Warrnambool's rental market was not black and white.
He said the lack of supply had pushed up rental returns for investors, but restrictions brought in by the Australian Prudential Regulation Authority two years ago put the brakes on investment. APRA would only allow 10 per cent of bank lending to investors, Mr Northeast said.
"That lag has caught up with us now," he said.
"We are at the critical point where just haven't got enough homes to house people."
REIV chief executive officer Gil King said three-bedroom homes in Warrnambool were a sound investment, ranking 13th in the state.
With the median price for a three-bedroom house $329,500 and a return of about $350 a week, Mr King said investors only needed a "modest outlay" to enter the profitable market.
"Warrnambool has consistently delivered strong rental returns," he said.
The median price for a three-bedroom house had increased 3.8 per cent since 2013, and rent increased 9.4 per cent over the same period, he said.
Warrnambool's rental vacancy rate dropped from two per cent in July 2018 to 1.2 per cent in July 2019.
He said there was a trend for young people to rent and live in Melbourne while buying an investment property in more affordable regional areas.
Warrnambool City Council was contacted for comment.
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