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Rentals tighten, growth eases, constraints are working

Posted @ Oct 19th 2022 3:13am - By AD Admin

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Rentals tighten, growth eases, constraints are working

Australia’s rental market continues to tighten to record levels, the pace of rental growth has started to ease, suggesting affordability constraints are having an impact.

CoreLogic’s Quarterly Rental Review for Q3 2022, released today, shows the national rental index had its smallest monthly increase this year, up 0.6% in the month to September and 2.3% over the September quarter, a 60 basis point decrease on the three months to June (2.9%).

The quarterly trend in national rental values is now 70 basis points below the recent peak rate recorded in May (3.0%).

CoreLogic Research Analyst and report author Kaytlin Ezzy said despite the slowdown in the monthly and quarterly rate of growth, the annual growth trend in national rents held steady at record high 10% in August and September.

“The past few years has seen unprecedented growth in rental values,” she said.

“We saw rents fall marginally over the first few months of COVID, but, since August 2020, national dwelling rents have surged almost 20%, equivalent to a weekly rent rise of approximately $90 per week.

“Initially driven by a reduction in the average household size, the continued upswing in values is likely now predominantly being driven by the strong return of overseas migration, coupled with extremely tight rental supply.”

Ms Ezzy said the easing in rental growth was a little surprising, particularly given such low vacancy rates.

“The slow down in the rate of rental growth may suggest an increasing number of prospective tenants are starting to come up against affordability constraints,” she said.

“As high non-discretionary inflation, along with increasing rents put additional stress on a renter’s balance sheet, it is likely a growing number of tenants look to reform larger households or find more affordable rental options in an attempt to reduce costs.”

Record low vacancy rates

Supply continues to be an important factor impacting rental markets with the total supply of advertised rental stock -35.4% below the previous five-year average.

National dwelling vacancy rates tightened from 1.3% in June to 1.1% in September, the lowest national vacancy rate on record.

“One factor which has likely negatively impacted rental supply is the decline in investor purchasing activity between early 2017 and early 2020,” Ms Ezzy said.

“Through this period, a mix of temporary changes to mortgage lending conditions, and the uncertainty surrounding the onset of COVID-19 limited residential property purchases. Additionally, CoreLogic recorded an increase in investor-owned housing stock being listed for sale through 2021 and into 2022, with many investors possibly looking to maximise capital gains through the upswing.”

Capital cities vs regional rents

Rental growth across the combined capitals continues to outpace rent rises across the combined regionals.

Ms Ezzy said this trend was largely owing to the return of overseas migrants, who typically choose to rent in high-density markets of Sydney and Melbourne upon arrival.

Rental growth in the combined capitals was up 2.7% and 1.3% across the regions, over the three months to September.

“While both markets saw the pace of quarterly growth ease compared to the June quarter, the decline in the rate of growth seen across the combined regional markets was significantly stronger,” she said.

“However, despite the easing growth trend, rental availability in both markets remains extremely tight, with the capitals recording a monthly vacancy rate of 1.1%, while just 1.0% of regional rental properties were observed as vacant in September.”

Capital best and worst performers

Brisbane recorded the strongest quarterly rise in dwelling rents (3.8%) of any capital city, despite the pace of growth easing from the recent peak rate of growth (4.2%) recorded over the three months to August.

Adelaide and Darwin both recorded an increase in rental values of 3.6% over the quarter, while Sydney, Perth and Melbourne, saw dwelling rents rise 2.9%, 2.5% and 2.3% respectively.

Canberra was the exception, with dwelling rents declining -0.4% over the three months to September due to a -0.9% fall in house rents. Rental values across Hobart rose 0.4%, an increase on the 0.1% rise recorded over the three months to August.

Despite recent declines, Canberra maintained its position as Australia’s most expensive capital city rental market (just), with a median weekly rental value of $682, followed by Sydney ($665 per week), Darwin ($590 per week) and Brisbane ($573 per week). Melbourne retained its position as the most affordable capital to rent in ($495 per week), followed by Adelaide ($508 per week), Perth ($533 per week) and Hobart ($551 per week).

“With Sydney recording strong rental growth at a time when rents are declining across Canberra, the gap between Australia’s two most expensive rental markets has narrowed to just $17 per week,” Ms Ezzy said.

“Given international migration is expected to continue to support rental demand across Sydney while affordability is expected to hamper Canberra’s rental growth, it’s likely we’ll see Sydney overtake Canberra as Australia’s most expensive capital city rental market in the coming months.”

Yields bouncing back

Gross rental yields continue to expand, with rental values rising as housing values depreciate. National dwelling values fell -4.1% while national dwelling rental values rose 2.3%over the September quarter, resulting in a rise in dwelling yields of 24 basis points to 3.57%.

Ms Ezzy said while yields are above the record lows recorded in February (3.21%) they are still well below the pre-pandemic decade average of 4.24%.

“With interest rates expected to continue rising throughout the first half of 2023, it’s likely we’ll see further downwards pressure on housing values,” Ms Ezzy said.

“In this scenario it is likely rental yields will continue to improve with the combination of continued rental growth and falling values being a potential catalyst for national dwelling yields to return to long-term averages, which could help offset the highest mortgage costs investors are facing.

“Once interest rates have stabilised, higher yields coupled with lower values and stronger buying conditions, could entice more investors to enter the market, which would ultimately help raise rental supply.”

CoreLogic Q3 2022 Rental Review Key Trends

  • National dwelling rents rose 0.6% in September and 2.3% over the September quarter, down from a 2.9% increase recorded over the June quarter.
  • Annual growth in national dwelling rents broke into double digits for the first time on record over the year to August, and held steady at 10.0% over the 12 months to September.
  • Seven of the eight capitals saw dwelling rents rise over the quarter and year.
  • Canberra was the only capital city market which recorded a quarterly fall in dwelling rental values(-0.4%), driven by a -0.9% decline in house rents.
  • National units recorded a new peak annual growth rate of 11.8% over the 12 months to September.
  • The annual growth in national house rents slowed to 9.4% in September.
  • The gap between Australia’s two most expensive capital city rental markets (Canberra and Sydney) narrowed to $17 per week, with Canberra rents falling as Sydney dwellings recorded strong rental growth.
  • Brisbane unit rents recorded the strongest quarterly growth rate in September (4.6%), while Adelaide and Brisbane tied for the strongest rise in house rents (3.6%).
  • Sydney overtook Canberra as Australia’s most expensive unit rental market ($594 per week), while Canberra remains the most expensive capital to rent a house in (730 per week).
  • Melbourne remains Australia’s most affordable capital to rent a house in ($518 per week), while Adelaide is the most affordable city to rent a unit at $423 per week.

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