John McGrath – What’s Driving The Rental Market Across Australia?

Rental values are rising at their fastest pace in a decade, according to a new report from CoreLogic. So, what’s pushing rental values higher?

There’s a few factors behind the 6.6% average surge in rents across Australia over FY21. That’s triple the 10-year average growth rate of 1.8% by the way, so something major must have happened and, of course, you know what it is – the pandemic.

COVID-19 and its flow-on effects have impacted rental values in five unique ways:

• The rental moratoriums put in place to protect tenants in 2020 resulted in very low turnover of rentals for an extended period. This created a backlog of demand, so when the moratoriums ended, landlords were able to raise their rents significantly

   

• COVID-19 has led to more internal migration, as city dwellers who can work from home do a seachange or treechange to regional areas within their own state or other states – the most popular being Queensland. This has created a population surge in many lifestyle areas and pushed rental values higher due to the new demand

   

• Some investors are leveraging the strong market to take profits. This is reducing the pool of rental homes available to tenants. According to REA data, one in four homes sold in the month of June were ex-rentals

   

• New mining activity – and hence new mining jobs – in Western Australia and Queensland are driving up rental demand in certain areas, not just in mining towns but also coastal areas and capital cities with transport links to FIFO mining sites

   

• Western Australia’s hard border in 2020 meant new mining workers and existing FIFOs from the East Coast had to permanently relocate to WA to keep their jobs and avoid quarantine

Rents have skyrocketed in some areas, such as South East Tasmania which recorded the greatest rental value gains over the year at 23.7%. This was largely due to increased internal migration.

The other top 10 regions for rental value growth include Darwin (21.8%); Mandurah in coastal Western Australia (21%); four areas of Perth (16%-17.5%); Coffs Harbour-Grafton (16.7%) and the Richmond-Tweed regions (19.9%) in NSW; and the Sunshine Coast (17.8%) in Queensland.

Darwin and Western Australia feature heavily in the top 10 not only because of mining but also a tightened supply of rentals due to investors gradually leaving these markets over several years since 2014 when the last mining boom ended.

Seachanging and treechanging is largely responsible for the surge in rental values in Coffs Harbour-Grafton, the Richmond-Tweed (which incorporates Byron Bay) and the Sunshine Coast.

Rents fell in various parts of Melbourne and Sydney, with the greatest loss occurring in Inner Melbourne at -7.2%. It’s no surprise this market has dropped given its reliance on migrants and overseas students, however this will turn around as soon as the international border reopens.

Parramatta in western Sydney also lost some rental value but only -2.1% over the year. This also relates to a loss of demand from migrants and students, who are attracted to Parramatta for its multicultural community, vast local amenities and its proximity to the University of Western Sydney.

As the pandemic continues to drag on, it’s fair to say that the drivers of rental growth will remain in place for most of FY22.

This presents good opportunities, not only for investors who are returning to the residential market in droves right now, but also inner city tenants in Sydney and Melbourne who can continue to enjoy far less competition for the best rental homes while the border remains shut.