Pace Of Rental Inflation Slows

The national rental index increased by 0.6% in September, the lowest monthly rise in rents since December 2021, according to CoreLogic.

At the national level, rental growth moved through a peak in May 2022 with a 1.0% rise; since that time, the monthly pace of rental growth has been easing. This trend in rents is evident across most regions, but has been clearest across regional Australia where monthly rental increases have reduced from a peak of 1.4% in January 2021 to just 0.3% in September 2022.

The slowdown in rental growth is a little surprising given rental vacancy rates remain so low and overseas migration is ramping up, although there has been a subtle uptick in vacancy rates across some regions.

“A gradual slowdown in rental growth in the face of such 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 16.5% and regional rents are up 25.1%. 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.

Further evidence of a shift of rental demand towards higher density options can be seen in the higher growth rate of unit rents over house rents. Capital city unit rents increased by 3.8% over the September quarter compared with a 2.3% rise in house rents. This trend is broad-based, with every capital city apart from Perth recording a faster rise in unit rents than house rents.

“A material rise in rental supply seems a long way off, considering private sector investment activity is trending lower and a larger than normal portion of for sale listings are investor-owned properties.”

As rents continue to rise and dwelling values generally trend lower, gross rental yields remain on a rapid upwards trajectory. Capital city gross yields (3.36%) are now at the highest level since January 2021 after rising 40 basis points from the February 2022 record low. This was largely led by a 55 basis point rise in unit yields, while house yields rose by 23 basis points. Despite rising by a smaller 24 basis points, regional yields are substantially higher than gross yields across the combined capitals at 4.3% and 3.4% respectively.

Could the bottom of this market cycle be near?

Frankly, it may have already passed. While it’s too early to say, the busy spring season has arrived and auction clearance rates have remained solid despite the increased volume of listings. In fact, clearance rates have been on an upward trajectory since July. When it comes to prices, since they started dropping in April, September produced the smallest declines. When October’s results are in, we may see evidence of reversal in many markets.

Official interest rates are expected to continue to rise but remain historically low, and First National’s agents have seen a 10.4% surge in first home buyers at open homes. Knowing first home buyers have an almost innate sense for opportunity, this would certainly suggest they’re keen to get in before prices start rising again.

Where next with official interest rates?

The most important factor influencing housing markets will be the trajectory of interest rates, which remains highly uncertain.

The cash rate has lifted 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.