Rent values continue to see strong growth, though gross rental yields are compressing, according to CoreLogic.
In the year to June, Australian rent values increased 6.6%; the strongest annual appreciation in rents since February 2009. The highest annual growth in rent values was across Darwin, where rents have increased 21.8% across the dwelling market. This was followed by Perth (16.7%).
As with national home values, much of the increase in rental rates may be associated with government stimulus, increased household savings and a strong economic recovery from COVID restrictions. Rent value increases may also be a function of more subdued investor activity between late 2017 and mid-2020, and the resulting lower rental supply, as well as more demand deflecting towards rental markets in areas where home ownership has become less attainable due to affordability challenges.
Even the worst affected rental markets showed a more defined recovery trend through June. Across Sydney, unit rents were – 1.1% lower over the year to June. This is up from a recent trough in the annual growth rate of -5.7% in the year to December 2020. In Melbourne, the annual change in unit rent values was -6.4%, recovering slightly from year-on-year declines of -8.2% in the 12 months to March 2021.
Due to property value increases outpacing rents, gross rental yields have compressed further through June. Across the combined capital cities, gross rental yields hit a record low 3.1%, and combined regional Australia has also seen a fresh record low of 4.5%. ABS housing finance figures to April have shown a strong lift in investor financing since the start of the year, albeit off low levels. The return of investors to the Australian dwelling market may help to gradually ease rental conditions.
Overall, the housing market has shown a remarkable turnaround from initial expectations around COVID-19. However, the housing market has clearly lost some growth momentum. Persistently high housing value growth rates are proving unsustainable, from both an affordability perspective, and renewed headwinds amid a lockdown in Sydney and other parts of the country.
Affordability constraints and the potential for tighter lending conditions and rising mortgage rates remain the primary headwinds for property market performance.
Even without recent developments of COVID-19 in Australia, it is clear that the housing market is losing momentum as affordability constraints build. More expensive credit, or credit that is harder to obtain, could further shift market dynamics.
Already through June, several of the major banks have forecast cash rate increases earlier than has previously been indicated by the RBA. A sooner-than-expected uplift in the cash rate would bring forward mortgage rate rises, and reduce demand for credit.
Furthermore, off the back of APRA writing to major lenders to ensure proactive risk management in home lending, there have been early signs of more conservative home loan assessments.