Nationally rents rose another 0.6% in October led by a 1.1% rise in unit rents while house rents increased by 0.5%.


The trend towards higher rental growth across the unit sector is evident across most of the capital cities and rest-of-state markets. This demand for medium to high density styles of accommodation can probably be attributed to rental demand transitioning towards more affordable rental options such as units, along with the added demand from overseas migration which tends to favour inner city unit rents, especially in Melbourne and Sydney.


Unsurprisingly, Melbourne and Sydney are also recording the highest annual rental appreciation for units, with rents up 13.7% and 13.4% respectively over the past 12 months.


More broadly, the speed of rental growth has been slowing, with the rolling quarterly rate of national rental growth dropping from 3.0% over the three months ending May 2022 to 2.1% over the most recent three month period.


“A gradual slowdown in rental growth in the face of low vacancy rates could be an early sign that renters are reaching an affordability ceiling. Since the onset of COVID, capital city rents have risen 17.7% and regional rents are up 25.5%. Although rents are likely to continue to rise, it’s likely renters will be progressively seeking rental options across the medium to high density sector, where renting is cheaper, or maximising the number of people in the tenancy in an effort to spread higher rental costs across a larger household,” Mr Lawless said.


As rents continue to rise and dwelling values generally trend lower, gross rental yields remain on a rapid upwards trajectory. Capital city gross yields (3.43%) are now at the highest level since November 2020 after rising 47 basis points from the February 2022 record low. This was largely led by a 57 basis point rise in unit yields, while house yields rose by 43 basis points. Despite rising by a smaller 34 basis points since the April low, regional yields are substantially higher than gross yields across the combined capitals at 4.4% for houses and 3.4% for units respectively.


Where next with interest rates?


The most important factor influencing housing markets will be the trajectory of interest rates, which remains highly uncertain. The cash rate has surged 225 basis points higher through the tightening cycle to-date; interest rates have not risen at this fast a pace since 1994, when households were arguably less sensitive to a sharp rise in the cost of debt.

“In the September quarter of ’94, the ratio of housing debt to household disposable income was just 46.8. The impact of a higher cost of debt is far more meaningful now, with a housing debt to household income ratio of 143.7 recorded in March 2022,” Mr Lawless said.


A new owner-occupier borrower taking out a $750,000, 30-year mortgage on principal and interest terms, is already paying approximately $943 more per month than they would have pre-rate hikes. Another 50 basis point rise in mortgage rates would (approximately) add $228 per month under the same scenario.


Financial markets are now pricing in a peak in the cash rate around 4.1% between June and August of next year, while private sector economists are generally less bearish, with Bloomberg recently reporting a median forecast of 3.35% as the peak cash rate in the first quarter of next year.


Gross Rental Yields Nationally


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