Rental affordability gap slashed; national unit rents only $39 a week cheaper than houses

Key takeaways

There is a high demand for rental units in capital cities, driven by factors such as increased student enrollment, worker rental demand in inner city areas, attraction of lower unit rental rates, and the return of overseas migrants and international students.

The shortage of available unit listings and high tenant demand has resulted in a significant decrease in the gap between median house and unit rents. The gap has dropped from $64/week to $39/week in just one year.

Unit rents continue to outpace house rents, with a 1.6% increase in capital city unit rents compared to a 0.9% increase in house rents in April.

Sydney remains the most expensive rental market, with unit rents rising by 1.9% in April. Melbourne, Perth, Brisbane, Adelaide, and Hobart also experienced rental growth, while unit rents in Canberra remained steady and fell in Darwin.

Vacancy rates across most capital cities are near record lows, and the total advertised rental supply is almost 40% below the five-year average. The limited supply of rental units contributes to the increase in rents.

The preference for more affordable accommodation has resulted in the narrowing of the gap between house and unit rents. Units are considered the affordable option for many tenants, but the increasing demand and low availability are causing rents to rise rapidly.

The persistent shortage of unit listings, approximately 10,000 listings below the expected levels, has helped stabilize unit values. The limited supply has shifted negotiation power in favor of sellers, putting upward pressure on unit values.

While unit values may have bottomed out, there are still various market forces and economic factors that can influence the short-term outlook. The increase in values and corresponding wealth effect could potentially lead to further cash rate increases and impact property values.

Strong tenant demand for capital city unit rentals and a shortage of available listings has drastically closed the gap between median house and unit rents, with the gap dropping from $64/week to $39/week in the space of a year.

CoreLogic’s monthly Australian Unit Market Update shows growth across capital city unit rents continues to outpace house rents, increasing 1.6% and 0.9% in April, respectively.

Domestic factors including more Australian students returning to campus, worker rental demand in inner city areas, and the attraction of lower unit rental rates – coupled with the strong return of overseas migrants and international students, has resulted in a record 4.9% increase in unit rents for the combined capitals over the three months to April.

The increase has roughly added $26 to average weekly rental values taking them to $560/week.

Australia’s most expensive rental market

Sydney continues to lead the capitals, with unit rents rising 1.9% in April.

This was followed by Melbourne (1.7%), Perth (1.6%), Brisbane (1.1%), Adelaide (1.0%) and Hobart (0.4%), while unit rents across Canberra held steady and fell across Darwin (-0.2%).

With the exception of Hobart and Canberra, vacancy rates across most of our capital cities remain near record lows and the total advertised rental supply is almost 40% below the five-year average.

The continued surge in Sydney unit rents has seen a new record annual increase of 19.1%, equivalent to an extra $106/week, or almost $5,500 more yearly.

The preference for more affordable accommodation had an unfortunate negative knock-on effect with the gap between house and unit rents closing to less than $40 a week.

There is no ignoring the fact that the mismatch between supply and demand continues to be the driving force pushing capital city rents higher.

Units are the affordable option for many

Units are the affordable option for many; new migrants, students, service workers and many other tenant types.

But the increase in demand and low availability is forcing rents to increase increasingly and causing the affordability gap between houses and units to close rapidly.

As the gap continues to narrow, we could see more rental demand shift towards the housing sector, or as we’re potentially already seeing, flow into additional purchasing demand with some prospective buyers fast-tracking their decision to become homeowners.

Australian unit values rose for the second consecutive month, up 0.7% in April, taking the rolling quarterly trend to 1.2%.

Units continued to outperform houses across monthly, quarterly and annual trends, with unit values declining - 4.9% for the 12 months to the end of April compared to houses, which fell -8.9% for the same period.

Sydney’s unit market led the charge in April, increasing 1.2% for the month, with six of the eight capitals again recording a monthly rise in unit values.

The resilience of unit values through the recent downswing has seen Adelaide units reach a new cyclical peak in value while Brisbane and Perth units are just -1.3% and -1.4% below peak.

Continued listings shortfall has helped stabilise unit values

In April, national unit listings continue to be around -20% below the levels typically expected this time of year, a shortfall of around 10,000 listings.

The persistent lack of listings has seen more negotiation power shift back in favour of sellers, putting upward pressure on unit values.

It is likely unit values have bottomed, but there continue to be many market forces and economic considerations to keep in mind over the short term.

The uptick in values and corresponding wealth effect could work to undo some of the softening in economic conditions, which could lead to further cash rate increases.

If this transpires, we would anticipate a softening in values.

About Kaitlin Ezzy Kaytlin is a skilled research analyst and key member within CoreLogic’s research team. She specialises in collating large and customised data sets, data visualisation and residential data reports. www.Corelogic.com.au