Australia’s renters may face tough times ahead before relief

The state of Australia's rental market is concerning, with no signs of relief in sight.

Advertised rents have surged while vacancies have hit historic lows, all due to a scarcity of rental properties.

Over the past year, the demand has shifted from regional areas to the capital cities, particularly the unit market, as overseas migration resumed and city living regained popularity.

However, the outlook remains challenging due to ongoing strong net migration and a slump in apartment construction.

Apartment approvals fall sharply

The Australian construction industry is experiencing significant challenges, with building approvals plummeting to their lowest levels in a decade.

Private sector apartment approvals have been hit the hardest, dropping by a staggering 46% year-on-year, especially for larger builds.

House approvals, while not as severely affected, have still fallen by 14%, now trending below the 15-year monthly average.

It’s been well documented that supply shortages and the dramatic increase in the cost of construction has caused many builders to go bankrupt and made other builders and developers wary of commencing new development projects.

And even if developers did want to commence new projects, currently financially the sums just don't add up.

The cost of building new houses has increased by around 30% over the last couple of years and the cost of developing new apartment towers has increased by over 50% in the same time frame, meaning new developments are just not financially viable at today's market prices.

As a result, new projects are not being proposed as much as before.

For homeowners, this means that the limited supply of homes will continue to support property values.

However, for renters, it's a different story.

Persistent shortage of rentals – a supply-side response is needed

The rental market is facing a severe scarcity of available rentals and growth in the supply of new rentals is expected to remain limited.

In the past year, median advertised rents on realestate.com.au increased by 11%, while new data has revealed that rental vacancy rates remain extremely low.

Nationally, the rental vacancy rate is just 1.5%, less than half what it was pre-pandemic.

And some parts of the country are substantially tighter than that: Adelaide and Perth both have vacancy rates below 1%.

This is concerning because the supply side of the housing market should be able to adjust when needed.

Recent PropTrack rental vacancy rate data for March indicates that markets are continuing to tighten, with vacancy rates declining to below 1.5%.

Even before the reopening of international borders, the rental market was tough, as household sizes shrank and investor activity was subdued.

From September 2021 to September 2022, the population grew by a record 418,500 people, driven by net overseas migration of more than 300,000 people in the same period, almost a record.

In fact, in the September quarter, Australia experienced the largest quarterly net inflow of overseas migrants on record, with 106,000 people.

Net permanent and long-term arrivals, which provide a more timely measure of the official migration data, indicate that this strength continued into the end of 2022 and the beginning of this year.

As a result, the national rental vacancy rate has dropped to 1.47%, the lowest level recorded well before the pandemic.

This highlights the challenge renters are facing in finding suitable rental properties.

Unfortunately for renters, rental markets are likely to remain extremely tight for some time, and rents are likely to continue to grow quickly as a result.

We’re in the current rental crisis because we don’t have enough rentals.

Solving that ultimately means we have to build more homes. It is the only long-term sustainable solution.

Unfortunately we are, if anything, heading in the other direction.

Where is everybody going to live?

The rental market is facing a severe supply-demand imbalance that is already having a significant impact.

In December 2022, total rental listings in the combined capital cities hit an all-time low, and have only increased slightly by 4% since then.

Listings have decreased by more than half in Perth, Darwin, Melbourne, Brisbane, and Adelaide compared to pre-pandemic levels.

In Sydney, listings have dropped by almost 48% from their peak in May 2020, while Melbourne hit a record low in March 2023.

The lack of available rentals is pushing vacancy rates down and causing weekly rents to rise sharply.

These challenges are not just reflected in higher weekly rents, but also in the speed at which properties are being rented out due to intense competition for limited rentals.

This situation may force renters back into share houses or encourage them to buy sooner, but it is not a sustainable solution. Increasing the supply of available rentals takes time, and there is no significant relief on the horizon.

Strong migration, low vacancy rates, and limited new supply mean that tough conditions for renters are likely to continue, especially in Sydney, Melbourne, and Brisbane.

Younger, lower-income Australians are disproportionately affected by these challenges, as close to one-third of all Australian households rent.

Renters are more likely to be younger Australians with lower incomes and less wealth than owner-occupiers, making it difficult for them to navigate the challenging rental market.

To alleviate the burden of price pressures for vulnerable lower-income renters, increased funding and investment into social and affordable housing is needed, alongside a sustainable increase in the available pool of long-term rentals.

Additionally, expanding and increasing Commonwealth Rent Assistance would provide some relief to those struggling to afford rental prices.

Editor's note: The concept for this article and charts are from Eleanor Creagh, Senior Economist, Proptrack

About Leanne Jopson Leanne is National Director of Property Management at Metropole and a Property Professional in every sense of the word. With 20 years' experience in real estate, Leanne brings a wealth of knowledge and experience to maximise returns and minimise stress for their clients.