Rental trends have diversified, with the highest rental appreciation now occurring within the unit sector of the three largest capitals, led by a 16.7% jump in Sydney unit rents over the past year, according to CoreLogic.
Although unit rents in the largest cities showed a period of weakness through the early phase of the pandemic, weekly rental values for units are now 19.0% higher than at the onset of COVID in Sydney, 10.4% higher across Melbourne and 23.6% up in Brisbane.
Several factors are likely to be contributing to the surge in unit rents. Rental affordability pressures may be forcing a transition of demand towards higher-density rental options (where costs tend to be lower). Additionally, the strong rebound in foreign student and international migrant arrivals are adding to rental demand, particularly in inner city precincts as well as areas within close proximity to universities and transport hubs.
Annual growth in house rents (as opposed to unit rents) has eased in some cities, which is potentially a reflection of renters reaching a ceiling on what they are able or willing to pay, rather than a rebalancing of rental supply and demand across the low-density sector. At the combined capital city level, annual growth in house rents has stabilised at 9.5% over the past four months, but the quarterly trend indicates a further slowdown in the pace of rental growth for houses.
With vacancy rates remaining around record lows, it is likely rents will continue to rise at least through the rest of the year.
“We aren’t seeing much in the way of a rental supply response. The latest data on private sector investment activity is still trending lower, and new unit commencements continue to fall after holding below the decade average in late 2018. Additional federal funding for social and community housing isn’t in the budget until 2024, and even then, that will take some time to deliver,” says Lawless, CoreLogic’s research director.
“Against this scenario of limited new rental supply, demand looks set to rise further based on the influx of overseas arrivals, amplified by an additional 35,000 permanent migrants relative to prior years.”
Gross yields continue to trend higher as rents consistently outpace housing values. Across the combined capitals, gross dwelling yields bottomed out at 2.96% in late 2021/early 2022. Since that time, gross yields have risen by 69 basis points to 3.65%, the highest level since October 2019. However, net yields, which take into account mortgage costs, are likely to have trended lower, especially for highly leveraged investors.
Sharp reduction in the rate of property value declines.
CoreLogic’s February Home Value Index showed a deceleration in the rate of property price falls last month, with the national index falling by just-0.14%, the smallest monthly decrease since May 2022.
The increase in Sydney dwelling values by 0.3% was the primary factor behind this trend. Darwin was the only city to record a steeper monthly fall in February, with every other city except Hobart seeing housing values fall by less than half a per cent.
Tim Lawless, CoreLogic’s research director, attributed the stabilisation in housing values to consistently low advertised supply levels and a rise in auction clearance rates. However, he also cautioned that the improving trend might be short-lived due to higher interest rates and lower sentiment.