While housing value growth has slowed, rents continue to rise swiftly. Nationally, CoreLogic’s Hedonic Rental Index increased 1.0% in May, taking the quarterly rate of growth to 3.0%, up 60 basis points on a year ago.
The annual change in rents is now tracking at 8.8% across the combined capital cities and 10.8% across the combined regions.
Unit rents now rising faster than houses
Unit rents are rising at a faster annual pace than house rents across the combined capital cities (where house rents increased 8.6% compared to 9.1% across units) and the combined regional areas (where house rents rose 10.7%, behind the 11.0% gain in units).
“Early in the pandemic rental demand for medium to high density dwellings fell sharply due to a preference shift towards larger homes and a demand shock from closed international borders,” CoreLogic’s Research Director, Tim Lawless said.
“As rental affordability pressures mount, demand for higher density rentals has steadily grown due to the unit sectors’ relative affordability advantage. More recently, demand has been boosted by international arrivals returning to the rental market.”
Yields rise in Sydney & Melbourne
Amidst rising rents and a general easing in home value growth, yields are recording some upwards momentum, especially in Sydney and Melbourne.
Sydney gross rental yields are up from a record low of 2.42% in December last year to 2.59%, while Melbourne yields have increased from a record low of 2.74% in December to 2.86%.
“Despite the upwards trajectory, yields remain remarkably low in both cities, but a recovery back to average levels may be relatively quick if housing values continue to fall while rents maintain this growth trajectory,” said Mr Lawless.
As interest rates normalise over the next 12 to 18 months, the expectation is most of Australia’s capital cities will move into a period of decline brought about by less demand.
Mr Lawless said the trajectory of interest rates will be a key factor in future housing market outcomes. Forecasts for where the cash rate may land are varied. After the Reserve Bank’s decision to lift the cash rate by 25 basis points at its May board meeting, the RBA noted: “it’s not unreasonable to expect that interest rates would get back to 2.5%.”
Financial markets are still betting on a cash rate above 3% before mid-2023, while economic commentators show a broad range in their cash rate forecasts.
With the housing debt to household income ratio at record highs, household balance sheets are likely to be more sensitive to rising interest rates.