Rental Market Conditions Diverse

Rental Market Conditions Diverse
12-04-2021

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.

 

According to CoreLogic, 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 for units than houses

 

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 are 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.

 

Rental market conditions diverse Melbourne apartment

 

Gross yields trend lower

 

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.

 

The prospect of tighter credit policies is on the radar

 

We know from previous periods of credit tightening that tighter credit policy will likely have an immediate dampening effect on housing activity. The likelihood and timing of any change in credit policies is 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. Short term interest rates are also unlikely to increase anytime soon.

 

Rental market conditions diverse gross rental yields