John McGrath - Relief for renters as heat comes out of market

Rents are barely rising at a national level, and are even starting to fall in some capital cities, providing relief for tenants after several years of very strong price growth amid historically low vacancy rates.

CoreLogic’s latest rental index rose by just 0.1% in July*, which was the lowest monthly increase for national rents in four years. Rents fell by 0.1% in Sydney and Brisbane, which is the first reduction in both major cities since 2020. Rents also declined in Hobart in July by 0.3%.

Growth in weekly rents has been continuing but at a slower pace for the past year, especially in the apartment market. Using Sydney as an example, annual growth in apartment rents fell from 17.9% in May last year to 6.6% today.

Now, 6.6% is still high by historical standards. In fact, it’s more than twice the pre-pandemic 10-year average of 2.7%. But at least we are seeing some heat come out of the market, which will certainly make life easier for the one in three Australians who live in rental properties.

CoreLogic attributes the slowdown in rental growth to a peak in net overseas migration back in the first quarter of last year. A huge component of the post-pandemic migration surge was international students. They like renting inner city apartments because that’s where many universities are located. So, we saw a spike in demand for those types of properties and now that demand is tapering off. There’s another interesting trend that is potentially taking some demand out of the rental apartment market. CoreLogic has dug deeper into the statistics and discovered that rental prices are growing faster for large properties with more bedrooms compared to small properties with just one or two.

For example, weekly rents for houses with one or two bedrooms rose by 7.6% nationally over the 12 months to June this year, while rents for houses with five or more bedrooms rose by 8.7%.

Meantime, there has been a significant reduction in rental growth for studios and one bedroom apartments. Annual growth has fallen from 16.8% in April last year to 7.1% today.

CoreLogic says this potentially reflects more renters getting together to form share households. Multi-generational families may also be doing the same thing. This is a reversal of pandemic trends where we saw many inner city share homes break up. As people began working from home, they decided they wanted their own space and could afford to live alone if they relocated to the suburbs. And it wasn’t just renters making this move. Plenty of people who owned homes in the inner city decided to relocate to the city outskirts, or regional areas, where they could buy a large forever home with dedicated home offices on a good block – perhaps with a pool.

This population dispersion contributed to a reduction in the average household size nationwide, which the Reserve Bank has directly linked to both rising rents and property values in recent years.

All of this is good news for tenants after some difficult years. Meantime, rents have re-rated across the country, and these better returns are helping landlords cope with higher interest rates on their investment loans and higher inflation pushing up other costs like council rates, water and insurance.

New investor activity is rising in the market today, with the Australian Bureau of Statistics reporting 37.1% of new loans went to investors in May. That’s the highest percentage in seven years.

We certainly need more rental homes in the market to keep up with population growth, so this is a welcome development. Property investors typically prioritise capital growth over rental yields, so the slowdown in rental price growth over the past year is not deterring them.

Gross rental yields for all types of properties are sitting above 3% in Sydney, Melbourne, Brisbane and Adelaide and above 4% in Perth, Hobart, Canberra and all regional markets.

This means rents are not covering investment loan repayments at today’s interest rates, nor any of the ongoing holding costs that landlords have to pay. Despite this, we are seeing strong investor activity, which indicates they are confident of solid capital growth over the medium to long term.

*Corelogic Hedonic rental index