Rental markets remain tight, with the annual pace of growth in national rents lifting to 7.7%, the fastest rental appreciation since 2008. Beneath the national figures, it’s clear that rental markets remain diverse. according to CoreLogic.
Where vacancy rates are lowest
Rental conditions across Darwin and Perth are the tightest amongst the capitals, reflecting low vacancy rates and high rental demand. Both cities saw a substantial reduction in investment activity from 2014 which has likely contributed to the short supply of rental accommodation.
Where vacancy rates are highest
At the other end of the spectrum are the apartment sectors of Melbourne and Sydney, where rental conditions have been substantially looser.
The good news for landlords is that rental markets in these areas are stabilising, following a substantial reduction in rents due to high vacancy rates attributable to stalled overseas migration and a preference shift away from high density living during the pandemic.
Gross rental yields down
With housing values outpacing rents, gross rental yields have trended lower.
The national gross yield has reduced from 4.1% two years ago to 3.4% in July this year, which is a record low. The most significant yield compression has been in Sydney, where gross yields have fallen to 2.5%, and in Melbourne at 2.8%. Every other capital city is recording gross yields at 4% or higher.
Considering mortgage rates on new investment loans are averaging around 2.8%, gross rental yields outside of Sydney and Melbourne are likely to be providing opportunities for positive cash flow investment opportunities. Considering yields outside of Sydney and Melbourne are high relative to mortgage rates and housing values are expected to rise further, we are likely to see investment activity continue to lift.
Other potential headwinds are apparent, including the possibility of tighter credit policies and an earlier than expected lift in interest rates.
Tighter credit policies, should they be introduced, would likely have an immediate dampening effect on housing markets, however the trigger for another round of macroprudential intervention isn’t yet apparent. APRA, the RBA and the broader Council of Financial Regulators are watching for any signs of a material slip in lending standards, as well as a more substantial lift in household debt or speculative activity. While each of these metrics is on the rise, the level is likely to be insufficient to trigger a response from APRA.
Similarly, a lift in the cash rate is likely to be at least 18 months away, but, depending on the trend in labour markets and inflation, we could see rates potentially rise earlier than the RBA’s 2024 forecast. The recent spate of lockdowns is likely to see Australia’s economy once again contract through the September quarter, a factor that is likely to keep rates on hold for a while longer, providing ongoing support for housing demand.