One of the most impacted sectors of our housing market amidst COVID-19 has been the rental markets.
The latest ANZ-Core Logic Housing Affordability report shows that the rental market has been more heavily affected than the buyers’ market in the current crisis, with a combination of falling demand and rising supply.
However, Australia does not have a ‘single’ rental market.
Australia has a collection of thousands of different rental markets with variations in demographic and workforce compositions, levels of supply and price points.
Here's what the ANZ report had to say:
Rental demand has been hit by a disproportionate loss of income in industry sectors where workers were more likely to be renting, and the closure of Australia’s borders to international travellers and migrants, who tend to rent when they first arrive rather than buy.
An increase in supply from the conversion of short-term accommodation to the long-term rental market, as a result of the weakness in the tourism market, is also impacting rental dynamics.
The combined effect is particularly uneven across geographies.
Inner Melbourne and inner Sydney suburbs have been the hardest hit, while in many regions rental markets have continued to tighten.
The overall weakness in the rental market will flow on to investors.
Investor demand for housing is already low.
Falling rents, alongside heightened uncertainty, will be a headwind for both house prices and construction, particularly in the apartment market.
The following is a summary of the key points from the report.
You can find a link to the full report here.
Rental markets getting hit from both lower demand and higher supply
The focus of housing affordability is often on home buyers; in particular prices, interest rates and deposits.
But with an increasing share of Australians renting their home, it is important we also look at rental metrics when thinking about housing affordability.
In the current crisis, the rental market has been more heavily affected than the buyers’ market, with a combination of falling demand and rising supply.
The main factors impacting the market are:
- A disproportionate loss of income in industry sectors where workers were more likely to be renting.
- The closure of Australia’s borders to international travellers and migrants, who tend to rent rather than buy when they first arrive in Australia.
- An increase in supply from the conversion of short-term accommodation to the long-term rental market, given the drop in tourism, particularly international tourism.
People who work in the hospitality sector, where job and income losses have been the deepest, have a much higher likelihood of renting their home than owning it.
Nearly 40% of workers in accommodation and food services rent, compared with a national average of just over 30%.
It is this sector that has been hardest hit by the pandemic, with the number of payroll jobs falling more than 20% since mid-March (Figure 2).
Moreover, in the inner suburbs of the major capital cities there is a much higher incidence of renting, as well as a greater share of residents working in hospitality.
In inner Melbourne, for example, nearly 70% of homes are rented, while almost 12% of people work in the accommodation and food services sector.
In inner Sydney, 62% of people rent their home, while over 11% work in hospitality.This disproportionate hit to incomes in these key markets has driven listings higher and rent values lower.
These markets have also been hit by international border closures.
New migration has effectively fallen to zero over the past few months, and this has removed a key source of demand.
With around 80% of new migrants renting their home, and around 75% of them choosing to live in Sydney and Melbourne, rental demand in these key areas has fallen sharply.
Moreover, while there has been a formal program to defer mortgage payments, relief for renters has been much less defined.
While an eviction moratorium remains in place, residential renters have not received any targeted relief.
The combined impact of these factors has driven sharp increases in rental listings across the two major capital cities.
For Melbourne as a whole, listings are up 16%, while in Sydney they are up 3.4% (Figure 3).
Elsewhere, however, rental listings have broadly fallen, highlighting the pandemic’s uneven effect on the rental market.
Even within Sydney and Melbourne, rental market performance has been remarkably disparate.
Both city’s inner suburbs have been harder hit than the outer suburbs.
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:This week’s Australian Property Market Update – Latest Data, State by State April 23rd 2024
- Also read:Melbourne property market forecast for 2024
- Also read:Brisbane’s property market forecast for 2024
- Also read:Sydney property market forecast for 2024
Rental listings are up 57% in inner Melbourne and 53% in inner Sydney.
In the outer suburbs, the picture is very different.
In the outer south west of Sydney, rental listings fell 26%; while in Melbourne’s north east, listings have fallen more than 12%.
The lift in rental listings is concentrated in the inner city.
The drop in demand and the resulting increase in rental listings has quickly flowed through to rents, but again performance has varied markedly across geographies.
Over the past three months, while Sydney and Melbourne rents have declined quite markedly, Hobart rents fell the most rapidly and Perth rents rose.
Within Melbourne and Sydney, rental performance has been quite diverse.
Inner city suburbs, like Southbank in Melbourne and Haymarket in Sydney, have seen rents decline by 7%.
In contrast, some suburbs in the outer ring of Sydney and Melbourne have continued to experience rental increases.
Across regional Australia, rents rose 0.4% in Q2.
Dynamics in the Hobart are quite different to the other capital cities.
While net overseas migration has become a more important driver of housing demand, natural increase and interstate migration drive Hobart’s population growth more than in the major capital cities.
Hobart also lacks the particular combination of very high proportions of renters and hospitality workers found in both inner Sydney and Melbourne.
Consequently, rental listings in Hobart have not risen; indeed, they have actually fallen over the past three months.
Rents in Hobart are still down, however, despite the drop in supply.
What is likely driving the sharp fall in rents is affordability.
Since December 2018, Hobart’s rental market has been the least affordable of the capital cities, and the 3.6% drop in employee wages reported since mid-March is clearly fed quite quickly through to downward pressure on rents.
Weak rental markets will deter investors
Rental market conditions will ultimately drive investor behaviour, and fluctuations in rental demand and supply will influence investor demand over the next few years, flowing through to both prices and construction.
Lower rents, rising vacancy rates and income uncertainty will weigh on investor sentiment.
Already housing finance data suggest that investor participation in the market is the lowest since the early 2000s.
That trend is likely to continue in the current environment.
This will put downward pressure on prices over the medium term, and also weigh on the construction outlook, particularly in the investor-heavy apartment market.
Housing affordability will deteriorate as income falls
While falling rents and declining house prices may raise hopes of an improvement in affordability, that is unlikely to be the case in the current environment.
Household incomes have fallen sharply in the wake of COVID-19 and the shutdowns, and that fall is likely to outpace the fall in housing prices and rents, at least in the short term, leading to a deterioration in housing affordability.
The financial impact of the virus has not been evenly felt and the stimulus measures designed to offset it will have varying impacts of their own.
Overlaying that is the persistent issue of low income growth, which continues to challenge policy makers.
For this reason, housing affordability will remain a key focus for policy makers, with the COVID-19 crisis only exacerbating the challenges facing governments.
The pandemic and its associated economic shock are likely to have long lasting impacts on housing affordability.
Source: ANZ-Core Logic Housing Affordability report
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
If you're wondering what will happen to property in 2020–2021 you are not alone.
You can trust the team at Metropole to provide you with direction, guidance and results.
In challenging times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that's what you exactly what you get from the multi award winning team at Metropole.
If you're looking at buying your next home or investment property here's 4 ways we can help you:
- Strategic property advice. - Allow us to build a Strategic Property Plan for you and your family. Planning is bringing the future into the present so you can do something about it now! This will give you direction, results and more certainty. Click here to learn more
- Buyer's agency - As Australia's most trusted buyers’ agents we've been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective - that's something money just can't buy. We'll help you find your next home or an investment grade property. Click here to learn how we can help you.
- Wealth Advisory - We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
- Property Management - Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
