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Market Update – August 2023

Rent values increase in more than 90% of Australian markets in the past year

 

Rent values increase in more than 90% of Australian markets in the past year

New suburb-level analysis of CoreLogic’s Mapping the Market interactive tool reveals more than nine in 10 house and unit markets across the country have seen an increase in rents over the 2022-23 financial year.

Of the markets analysed, almost two thirds of unit suburbs recorded an annual increase of 10% or more, as did more than one third of house markets.

The pace of rental growth will likely moderate

While annual rental increases remain fairly geographically widespread, it’s likely we’ll see the pace of rental growth continue to moderate over the coming months, as cumulative rental growth pushes more renters towards their affordability ceiling.

CoreLogic’s Mapping the Market tool also showed a continued ramp-up in the capital growth recovery trend nationally.

Almost 80% of house and unit markets showed a quarterly increase in home values in the three months to June, a stark contrast to the 80.7% that saw values fall between October and December last year.

This may also help to loosen rental markets in the year ahead, as investor confidence in the housing market may be bolstered by stronger capital growth conditions.

How long will Australia’s rental crisis last?

Rental price growth hits record highs

Currently, the rental markets in Australia still heavily favour landlords, as tenants face challenging conditions due to increasing demand and a limited supply of rental properties.

Across the combined capitals, data shows that we’re now in the longest stretch of continuous rental price growth on record as house rents rise for the 9th quarter in a row and unit rents rise for the 8th quarter.

Why is there a rental crisis in Australia?

1. SUPPLY SHORTAGE & LOW INVESTMENT ACTIVITY

Amid a property boom, a significant portion of investors sold their properties. Around 30% of current sellers are/were investors, many of whom sold during the 2020-21 post-Covid-19 property boom to capitalize on peak prices. These properties were mostly bought by owner-occupiers, reducing available rental/investment properties. High borrowing costs further limit investment property purchases, as rising property prices and interest rates deter buyers and landlords. This trend is evident in Australia’s reduced investment loan numbers. From 2017 to 2022, only 31% of new loans were for investment, compared to 38% in the previous 2002-2016 period, signaling a below-average trend.

2. INCREASED GOVERNMENT INTERVENTION DISSUADES INVESTORS

Tighter rental laws certainly do dissuade people from investing in property and many of our State governments are changing tenancy legislation in favour of tenants. One of the most attractive advantages of being a property investor is control – you want to have full control over how you use and improve your asset. These new tighter rental laws (that favour tenants) reduce the amount of control investors have over their property (like
the 83 changes Victoria rolled out in 2021). They also increase the cost to run a rental property thereby reducing investment returns.

3. SUPPLY OF NEW BUILDS IS ALSO THIN

During the pandemic, soaring materials and construction costs meant that fewer new dwellings were completed. Significant government support for the construction industry, such as HomeBuilder, had a large effect on the increased number of houses that were constructed (and are still under construction). But this was offset by reduced unit construction. Unit construction has much longer construction times, and uncertainty about demand and the economic environment delayed many projects. At the same time, this combination of headwinds means there has been an uptick in the number of building companies going into insolvency. Overall, the supply of new-build properties is much lower than prior to the pandemic.

4. MIGRATION LEVELS ARE HIGHER

An increase in regional migration during the pandemic led to increased rent values and low vacancy rates in both regional Australia as well as major cities. And since the international border reopened in early 2022 there has also been an influx of migrants coming into the country… looking for rental properties to live in. During the last quarter, the number of searches conducted from abroad for purchasing and renting properties on realestate.com.au reached an all
-time high, surpassing previous records set since PropTrack’s establishment in 2019. Comparing the past three months to the corresponding period in 2019, there has been a significant increase in rental property searches, with a rise of 34%. That’s a huge volume of additional people looking for somewhere to live.

5. SMALLER HOUSEHOLDS DRIVE INCREASED PROPERTY DEMAND

Shifting household dynamics have amplified the housing shortage. The rise of single-person and single-parent households has led to a decrease in average household size. Census data reveals a significant increase in one-person households from 2016 to mid-2021, while larger households with three or more individuals decreased. Although the average household size only slightly decreased from 2.59 to 2.55 people in recent years, this seemingly minor shift necessitates around 160,000 more dwellings to accommodate the same population. Additionally, the demand for larger residences with home office space and outdoor areas grew due to lockdowns and remote work.

When will rental prices drop?

The answer lies in an Australian bottleneck of aspiring first-time homeowners. Soaring housing costs strain young buyers. Younger generations’ preference for renting over immediate homeownership worsens this. Government data reveals declining homeownership rates in specific age groups. From 1971 to 2016, rates fell from 57.0% to 44.6% for ages 25-34, and from 71.4% to 62.2% for ages 35-44. Today, these figures are lower at 40.7% and 56.7%, respectively. These age groups also grapple with lower income and high living costs.

Australian Rental Market Overview

The rental market faces a perfect storm of low vacancies, rising rents, and limited supply. The supply-demand imbalance suggests little short- to medium-term relief for renters, as stock levels won’t significantly increase soon. Strong net migration contributes to upward rental pressure. Younger tenants grappling with affordability constraints have limited options, unable to borrow for rent like homeowners. Some are opting for shared houses due to affordability while others rush into homeownership or secure longer leases.

Net Migration’s Impact

Australia’s struggle to provide affordable housing is compounded by a new wave of demand from immigration. Open borders in 2022 brought back overseas arrivals, addressing job vacancies and boosting the economy. However, accommodating this influx poses challenges, as around 500,000 migrants are expected in 2022–23. Despite the surge’s temporary nature, finding housing for new renters remains a concern.

Government Intervention Challenges

Current policies hinder private property investor involvement in rental supply. Past decade’s hurdles for property investors include regulatory controls, interest rate changes, and tenancy law reforms. While the government seeks corporate participation in ‘build to rent,’ it’s limited and won’t address affordability. Policies to attract skilled labor and international students add more demand, leaving a significant housing shortage. Proposed solutions, like rent freezes, might exacerbate issues, evidenced by past experiences.

No Easy Fix

The rental crisis stems from a supply problem that necessitates increased private investor participation. Governments should balance rental laws, encourage local investment, and ease borrowing for investors. The prevailing stress test benchmark should be lowered, reflecting the interest rate cycle’s peak.
In sum, the rental crisis has no quick solution; addressing the supply issue requires concerted efforts to involve more private investors and make favorable policy changes.
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