Rental prices increased a further 0.8% in August across CoreLogic’s national rental index, easing after the monthly trend peaked in May when rents rose by 1.0%.
The slowdown in rental appreciation comes after annual rental growth reached double digits (10.0%) for the first time since at least 2006, when CoreLogic rental statistics commence.
The slowdown was most evident across regional Australia, where the annual rate of rental growth eased from 12.5% in November last year to 10.1% over the 12 months ending August. Growth in capital city rental trends looks to be easing a little as well, with the combined capitals recording a 10.0% rent rise over the past year, while the monthly trend eases from a recent peak of 1.1% in May to 1.0% in August.
Increase in asking prices slows most with freestanding rental homes
The slowdown in rental growth is more apparent in the detached housing sector, where renting tends to be more expensive. House rents across the combined capitals have increased at more than double the pace of unit rents over the past five years, rising 21.8% and 10.8% respectively.
“This trend is reversing as tenants become more willing to rent in higher density situations, especially in Sydney and Melbourne where unit rents are now rising at a much faster pace than house rents,” CoreLogic’s research Director, Mr Lawless said.
“Potentially we are seeing the first signs of smaller rental households that formed earlier in the pandemic reverting back to larger households or utilising higher density rental options to combat worsening rental affordability.”
National housing completions are also likely trending higher in 2022, particularly in the detached house segment, as an inflated number of builds slowly work through the construction pipeline. Mr Lawless said the trend may relieve some pressure on rental demand, as some tenants move out of rentals into their new homes.
However, as overseas migration normalises, it is likely rental demand will increase further. Without any signs of a material rise in rental supply, the outlook for rents remains one of further growth.
With rents consistently rising while housing values broadly trend lower, gross rental yields are firmly in recovery mode. After capital city gross dwelling yields bottomed out at the record low of 2.96% in February this year, yields have consistently risen to reach 3.29% in August.
While capital city yields are still well below the pre-COVID decade average (4.0%), considering the outlook for lower housing values and higher rents, we could see rental yields returning to around average levels over the next year.
Outlook remains one of uncertainty
The outlook for the housing market remains intertwined with the trajectory of interest rates. Forecasts for the terminal cash rate generally range from the mid-2% to the mid-3% range, although financial markets are pricing in a peak cash rate of just over 4% by August next year.
However, mortgage costs and rents are rising, and household budgets are stretched. The portion of annual household income required to service a new mortgage nationally increased to 44.0% in June, up from 40.4% over the March 2022 quarter, likely offsetting some of the improvements in other measures of housing affordability.