According to CoreLogic, the pace of rental growth has shown a subtle rebound over the past two months, which can partially be attributed to the seasonal strength in rental markets through the first quarter of the year.
Nationally, CoreLogic’s rental value index, which utilises a hedonic regression methodology similar to the HVI, was up 0.8% in February, holding firm from January (0.8%) and up from the 0.6% growth recorded in December.
The February rise in rents was focused within the unit market, with the national unit rental index up 0.9% over the month and 2.4% higher over the rolling quarter compared to +0.7% and 2.0% for houses respectfully.
According to Mr Lawless, this stronger trend in unit rents is most visible in Sydney and Melbourne.
“Anecdotally, demand for unit rentals in these cities has been bolstered by a combination of worsening rental affordability deflecting more demand towards the higher density sector, where rents tend to be lower, and demand starting to return from overseas arrivals,” he said.
With the pace of growth in housing values softening while rental growth holds reasonably firm, the gross yield profile has finally stabilised at 3.2%, the lowest rate on record. Sydney (2.4%) and Melbourne (2.8%), which have the lowest yield profiles, recorded a slight strengthening in gross yields this month, as rental growth nudges higher than growth in housing values.
According to Mr Lawless, we could be seeing rental yields moving through the bottom of their cycle.
“After several years of yield compression where gross rental yields reached historic lows across most of Australia’s capital cities, we are finally seeing early evidence of yield repair. If rents continue to rise faster than housing values, which is a strong possibility in Sydney and Melbourne, yields will continue to improve.”
“Cities such as Brisbane and Adelaide, where housing values are still consistently rising faster than rents, are likely to see yields compress to new record lows. Despite the downwards trend, yields in these cities remain well above Sydney and Melbourne levels,” Mr Lawless said.
Since the onset of the pandemic in March 2020, Australian housing values have risen by 24.6% adding, on average, roughly $144,000 to the value of an Australian dwelling. Such a high rate of capital gain in a period of low income growth can be explained by many factors, including:
- record low interest rates
- improved affordability following the 2017-2019 reduction in housing values
- higher levels of housing sentiment
- a surge in household savings amid lockdowns
- an imbalance between demand and supply
- fiscal policies that supported or incentivised housing activity
Each of these factors are losing their potency to drive housing values higher. Fixed-term mortgage rates have been trending higher since early 2021, with the upwards trend sharpening through the December quarter last year. Variable mortgage rates are set to rise in line with the cash rate, probably later this year, which is likely to weigh on borrowing decisions.