How high can rents go?
There’s no doubt that demand for housing and accommodation is on the rise as lockdowns and restrictions are eased.
And with rising demand comes increasing rent prices.
The latest data from all major property research companies show the national rental index is on an upward trend.
In their quarterly rental review, CoreLogic reported that across Australia, rents rose 1.9% during the December 2021 quarter. This is similar to what was recorded in the September quarter 2021.
The question in most people’s mind is: will this upward trend in rent continue and for how long? And how high can rent go?
While it’s always difficult to make predictions – when things will happen or what will happen in the future – what we can see is that there are signs that rising rents may be here for a while.
Let’s have a look at the factors behind the increasing rent levels.
Lack of available rental property – in an earlier article, we discussed the emerging problem of the lack of rental property in almost all major cities in Australia. This is primarily due to the strict rules imposed on property investors and their borrowing capacity.
Return of interstate residents – the outflow of people from their usual city or suburban residents to regional areas during the lockdowns is now reversing. This means tenants who left temporarily are now seeking rental accommodation back in the city or city fringes.
“We are starting to see signs of the reverse migration which can only accelerate as we get more international migrants as well; we have some clients who are now returning to Victoria after a temporary stay in Queensland.” – Sam Assaad – Senior Property Investment Specialist at Wealthi
Return to the office – with more businesses encouraging the return of their staff to the office, most people would seek the convenience of city or near-to-city living and accommodation. While a combination of work-from-home and work-in-the-office is possible for some industries, those who need to be physically in offices or places of work will need convenient and accessible accommodation. This means living in either units or townhouses near their place of work.
Return of overseas population – international students, tourists and other visitors have always been a substantial segment of tenant population in Australia. As they return, we will see continuing demand for rental property from this group.
Capital cities or regional areas, which will see higher rents?
According to CoreLogic’s data, the regional unit market has seen rents increase 41.4% in the past decade compared to capital city markets which registered 14.4% increase.
CoreLogic attributed the stronger rental conditions across the regional markets to the skewed demand and supply equation made worse by the surge in regional population due to the pandemic.
“While demand has risen we generally haven’t seen much of a supply response. Australia’s rental market is mostly reliant on private sector investors to provide rental housing,” said Tim Lawless, Research Director at CoreLogic.
Affordability drives unit rents
Comparing the rate of growth between units and houses, CoreLogic said unit rents have risen to a high of 3.0% in the March quarter, which is faster than the pace in house rents which rose to 2.4%.
The CoreLogic report said the stronger rental conditions across the unit sector demonstrate a remarkable turnaround in rental conditions across higher-density markets.
“What we’re seeing now is that renting a unit is substantially more affordable than renting a house. This affordability advantage, along with a gradual return of overseas migration, employees progressively returning to offices and inner-city precincts regaining some vibrancy, are likely key factors pushing unit rents higher,” Lawless said.
Strong lift in Sydney and Melbourne unit rents
Sydney is now recording the strongest lift in unit rents, up 8.3% over the 12 months to March following a 7.2% peak to trough fall in the first half of the pandemic. Similarly, Melbourne unit rents are up 6.9% over the past year after posting an 8.5% peak to trough fall.
Based on recent data, even Melbourne’s rental market, which was heavily affected by lockdowns, is showing signs of recovery. For the December 2021 quarter, rental units in Melbourne recorded a growth of 1.6%.
While Melbourne’s rents remain 5.5% below the record highs of July 2019, the recent momentum in unit rental growth could be a sign of a recovery trend, according to Lawless.
He added, “Melbourne’s unit market is now benefitting from higher demand as more domestic renters seek out affordable housing options in the unit sector. Demand for Melbourne unit rentals is likely to increase more sharply as foreign students and international visitors return.”
What does rising rent mean for property investors?
While some sectors of the community will continue to feel the pinch of rising rents and frustration about housing affordability (or unaffordability), property investors may be rewarded now that rent levels are starting to rise after being depressed for a while.
Buying investment properties in capital cities and major regional areas with strong growth potential will always pay off in the long term.
If you would like to discuss the Australian property market in more detail, please reach out to the Wealthi team. We’re happy to have a chat and show you how we can help you build a successful property portfolio.