Affordability Starting to Slow Rocketing Rents

As 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 the September quarter shows the national rental index had its smallest monthly increase this year, up 0.6 per cent in the month to September and 2.3 per cent over the September quarter, a 60 basis point decrease on the three months to June (2.9 per cent).

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

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 a record high of 10 per cent 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 per cent, 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.”

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

“The slowdown 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.”

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

National dwelling vacancy rates tightened from 1.3 per cent in June to 1.1 per cent 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,” Ezzy said.

“Through this period, a mix of temporary changes to mortgage lending conditions and the uncertainty surrounding the onset of Covid limited residential property purchases.”

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

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 per cent and 1.3 per cent across the regions over the three months to September.

Change in rents: September quarter, 2022

^{Source: Corelogic}

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

Adelaide and Darwin recorded an increase in rental values of 3.6 per cent over the quarter, while Sydney, Perth and Melbourne, experienced home rents rise 2.9 per cent, 2.5 per cent and 2.3 per cent respectively.

Canberra was the exception, with dwelling rents declining 0.4 per cent over the three months to September due to a 0.9 per cent fall in house rents. Rental values across Hobart rose 0.4 per cent, an increase on the 0.1 per cent 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 a week), Darwin ($590 a week) and Brisbane ($573 a week).

Melbourne retained its position as the most affordable capital to rent in ($495 a week), followed by Adelaide ($508 a week), Perth ($533 a week) and Hobart ($551 a 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,” 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.”

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