While our housing markets are surging around Australia, rental market conditions remain diverse, with significant differences between the regions and housing types.
From a geographic perspective, the tightest rental markets are Darwin and Perth, where both house and unit rents are recording double-digit annual growth.
Rents are rising at a record-setting pace across both Perth and Darwin, with the quarterly trend up 5.9% and 7.7% respectively.
Rental prices in Perth and Darwin started surging higher in September last year.
The monthly growth in rents across Perth quickly accelerated from an already high 1.1% in September 2020, to 2.0% by March 2021.
Darwin rents have risen by an average 2.1% per month for the past seven months, including a 2.4% lift in March 2021.
Both these markets have seen a recent history of low housing investment which has kept rental supply low at a time of rising demand.”
Although rents are surging in these cities, it is off the back of a long period of rental value declines.
Perth rents remain -16.0% ($80/week) below the 2013 peak and Darwin rents remain -24.6% ($150/week) below their 2014 peak.
Weaker rental conditions can be seen in the unit sector, both at a macro level and across the sub-regions of each city.
Overall, unit rents have been showing weaker conditions relative to houses throughout the COVID period to-date.
Since March last year, capital city house rents are up 5.2% while unit rents are down -3.8%.
The biggest drag on unit rents is Melbourne and Sydney, where unit rental conditions have been much weaker due to the demand shock caused by stalled overseas migration and international border closures.
Melbourne and Sydney unit rental markets appear to be stabilising.
Sydney unit rents have posted a subtle rise over the past three months, while unit rents in Melbourne have held firm over the same period.
The improvement comes after a long-running decline, however, a material improvement in rental conditions is likely to be dependent on foreign students and visitors returning to shore up inner-city unit rental demand.
With housing values rising faster than rents, gross rental yields have been trending lower.
Most regions are still showing a gross yield higher than typical mortgage rates, implying some opportunity for positive cash flow investments. Sydney and Melbourne stand out as having a much lower yield profile.
Both cities have seen gross yields fall to new record lows in March, with Sydney recording a gross yield of 2.7% and Melbourne dropping below the 3% mark for the first time on record.
Overall, housing markets are continuing to respond to a broad range of positive factors including record low-interest rates and recent economic conditions that have consistently beaten forecasts. In response, Australians are feeling optimistic and confident in making high commitment decisions related to the property market.
The upswing in buyer demand has not been met with the same level of increase in inventory.
This has resulted in strong selling conditions, amidst a palpable sense of urgency amongst buyers, putting upwards pressure on housing prices.
While we are expecting housing values to continue rising throughout 2021 and well into next year, it is reasonable to expect the pace of growth will slow.
Earlier periods of similar exuberance have been previously quelled by factors such as rising interest rates, weaker economic conditions, or changes to credit availability.
As the housing market hits record high values, speculation is mounting as to what will trigger the next downswing phase of the cycle.
Short-term interest rates are unlikely to increase any time soon, and the economic recovery has some way to go.
However, housing affordability constraints, particularly for those who do not own a property, are mounting.
There will be substantially less fiscal support going forward for homeowners and potential first home buyers, which will likely contribute to a tapering of demand.
This is especially the case amongst first home buyers where demand has been brought forward by a range of incentives set to end this year.
The prospect of tighter credit policies is also on the radar, which we know from previous periods of credit tightening will likely have an immediate dampening effect on housing activity.
The likelihood and timing of any change in credit policies are highly uncertain and largely dependent on a material lift in credit metrics such as debt to income ratios, loan to income ratios, or high LVR lending.
According to APRA, although each of these metrics rose in the final quarter of 2020, lending standards remain healthy enough to keep any credit intervention at bay for now.
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