We're experiencing a national rental crisis meaning it is getting harder and harder for would-be tenants to find a rental property in the current market.
There’s a lot of competition, rental demand is strong, and supply is tight.
And it could get even tougher if increasing mortgage repayments are passed on to tenants amidst tightening rental markets according to Eleanor Creagh, Senior Economist at the REA Group.
Rental supply is trending down
In a recent Insights commentary Creagh explained that the number of available rentals has fallen since the onset of the Covid pandemic.
"The number of homes available to rent has been trending lower since the pandemic began and rental listings are now almost a third lower than pre-pandemic levels (-28%).
Since February 2020, the number of homes available for rent across the capital cities has fallen by close to a quarter (-24%) and in the regions has plunged to almost half pre-pandemic levels (-40%)."
Rental demand is increasing
On the other hand, demand for rentals is strong Australia-wide and increasingly so in the capital cities.
Actually, the demand to rent is up COVID-normal is underway and this is translating into rental price pressures, with advertised rents surging in the past year.
Ms Creagh explained:
"Nationally, median advertised rents on realestate.com.au have increased by 7% in the past 12 months.
These pressures are being felt Australia wide but as cities return to life, increasingly so in the capitals."
Competition is heating up in the capital cities
Compared to May 2021, the number of potential renters per listing is up by more than a third (34.8%) in the capital cities, compared to just 0.3% in the regions.
This indicates that competition is heating up in the capitals, while rental demand is easing in the regions as the pandemic fades.
This resurgence in rental demand in the capital cities is particularly prevalent in Sydney, Melbourne, and Brisbane.
The apartment market is back
After lockdowns and restrictions made apartment living less attractive, reopened borders and revived city life is seeing more potential renters looking for options in the unit market.
Since this time last year, the number of potential renters per unit rental listing has increased 62% in Melbourne, 54% in Sydney, and almost doubled in Brisbane (up 71%).
Ms Creagh further explained:
"In recent months, both the Sydney and Melbourne rental markets have seen a significant turnaround after suffering the impacts of COVID, and rental price pressures are on the rise as these cities reawaken.
The pause on immigration hurt these markets the most, with many recent immigrants, particularly students, typically calling these population centres home.
Now, in Melbourne’s inner region, the number of potential renters per listing has almost doubled since this time last year.
In Melbourne, median weekly rents remain below that seen at the start of 2020 before the pandemic onslaught but have risen since the end of 2021.
And in Sydney, median weekly rents have just surpassed pre-pandemic levels to sit 2% higher than in February 2020.
This looks set to change with rental demand already increasing against a backdrop of tight supply."
According to Ms Creagh,
"Rental demand doesn’t look likely to ease any time soon, particularly with the international border reopened.
We know that recent arrivals to Australia are most likely to be renters, particularly in inner-city areas of Sydney and Melbourne."
But there's more to this trend.
Not only do renters face a shortage of vacant rentals and ongoing rental price pressures, but as interest rates rise, landlords may pass on some of the increasing cost of their mortgage repayments.
Ms Creagh commented:
"The cash rate moved off its record low in May and the Reserve Bank has since raised interest rates a further 50 basis points to 0.85% in June.
The board highlighted their commitment to “doing what is necessary” to rein in inflation pressures.
It’s a clear signal of a faster phase of tightening, with front-loaded rate hikes incoming.
Market pricing implies interest rates are on course to end the year above 3.0% and could hit 4.0% in 2023.
And it’s a double hit, with the upwards pressure on advertised rents in the capitals preceding a shift up in total rents, which is set to buoy the consumer price index data.
This will add to economy-wide inflation pressures and the prospect of continued interest rate rises."
Occupancy rates are up in the short-term rental market
Short-term rentals are also back in action with the borders having reopened, potentially reducing long-term rental stock further.
The onset of the COVID crisis had a significant impact on short-term rental markets worldwide.
According to data from AirDNA, which tracks the short-term rental industry, Australia had an average Airbnb occupancy rate of just 26.4% in 2021.
Ms Creagh explained:
This has changed as the borders have reopened.
Now, not only have available listings increased but occupancy rates have surged in every capital city across Australia, highlighting the short-term rental industry recovery.
This is another factor that could see rental supply remaining constrained.
Longer-term rental supply should be boosted by projects that are due to be completed over the next year or two.
Commencements are still high on a historic basis but have fallen from peak levels.
The construction industry is challenged at present by soaring raw materials costs and supply constraints.
But property price growth is softening and interest rates rising may curb future development or investor interest.
With a renewed inflow of overseas arrivals fueling further demand for rentals, against the backdrop of already tight rental markets and a population predicted to add 3.5 million people over the next decade, the cocktail for rental pressures does not look to be improving anytime soon.
Tight supply and tough competition could also make it easier for investors to pass on increased mortgage costs to renters."
What can we expect ahead?
It’s clear tight rental market conditions are not likely to ease anytime soon and rent price growth is likely to continue.
As Ms Creagh further commented:
"As rental price pressures continue to emerge in the period ahead, this could increase the attractiveness of buying for some current tenants.
Although, even as property prices soften, easing the deposit burden, the cost of servicing mortgage repayments is increasing.
It is a trade-off as lower home prices will be offset by higher mortgage costs as interest rates rise, and over the life of the loan that could be more costly.
Mortgage rates have moved higher, repayments are expected to continue to increase, and many can no longer borrow the same amount as they could have this time last year.
In addition, prospective buyers not only face higher borrowing costs but have a lot more uncertainty around future costs than those over the past two years, as interest rates are expected to rise quickly in the second half of this year."