According to CoreLogic, the rate of growth in national rents has continued to rise, although the pace of growth is also losing steam. On a quarterly basis, rental growth peaked in the March quarter at 3.2% and has consistently eased to 1.9% in the September quarter. However, the annual rate of growth is still rising, up 8.9% over the year to September.
Houses rents slowing the most
The easing rate of rental growth can mostly be attributed to a slowdown in house rents where the growth rate has softened from 3.5% in the March quarter to 1.9% in the September quarter. At the same time, growth in unit rents appear to have stabilised around 1.9% quarter-on-quarter, down from a recent peak of 2.5% in the three months to March.
Throughout the September quarter, we are now seeing unit rents rising at the same speed as house rents across Sydney (2.3%) and unit rents are rising faster than houses in Melbourne (1.3% for units and 1.1% for houses). This is a significant change in rental market trends, where previously the unit precincts, especially inner-city high-rise areas of Melbourne and Sydney, were acting as a drag on rental growth.
Yields reach record lows
With growth in housing values continuing to outpace growth in rents, rental yields have reached new record lows across most regions. Gross yields across the combined capitals have fallen to 3.0% in September, with gross yields in Sydney (2.5%) and Melbourne (2.8%) well below the other capitals. Yields across regional Australia are higher at 4.4%, with regional NSW and Victoria the only ‘rest-of-state’ regions with a gross yield below 4.0%.
Although yields are low, so too are investor mortgage rates. In July, the average three-year fixed rate for a new investor loan was 2.38% while variable rates were averaging 3.01%. Considering the low mortgage rates, opportunities for positive cash flow investment properties remain plentiful outside of Sydney and Melbourne.
Housing trends around Australia remain positive
Growth in housing values is being supported by an expectation that mortgage rates will remain at record lows for an extended period of time, while strong demand is occurring alongside persistently low advertised supply levels.
This dynamic is changing as the barriers to enter the housing market become higher. Raising a deposit and funding transactional costs has become a significant challenge for some sectors of the market, especially first home buyers who have not had the benefit of home ownership as a source of wealth.
Consumption patterns expected to change
A further trend to watch will be how consumption patterns are impacted by a post-lockdown environment. High savings rates have likely been one of the key factors adding to housing demand throughout the pandemic, with the household savings rate jumping to 22.0% through the June 2020 quarter amid harsh restrictions. With 70% vaccination rates triggering greater freedoms across parts of the country, households may return to more normalised, pre-pandemic consumption patterns and spending, which could further ease housing demand.