According to CoreLogic, rents have increased by 9.4% over the 2021 calendar year. Unit rents were up 7.5% over the year compared to the 10.1% lift recorded in house rents.
Rental growth trends across the unit sector have generally been milder than houses, with unit rentals being disproportionately affected by stalled overseas migration as well as domestic rental preferences shifting away from higher density options through the pandemic.
However, these trends are starting to change as rental affordability diverts demand back towards the unit sector.
‘In Melbourne, where unit rents fell by -8.5% between March 2020 and May 2021, higher density rental markets are now recording a faster rate of growth than houses, with Melbourne unit rents recording a 1.6% quarterly increase compared to the 0.9% rise seen in house rents,’ CoreLogic’s Research Director, Tim Lawless says.
Darwin shows toughest conditions for tenants
The tightest capital city rental market over the year has been Darwin, where dwelling rents rose 15.2%. Conditions have eased a little over the second half of the year, with annual rental growth moving through a peak of 22.3% over the 12 months ending August.
Although rents have surged across the northernmost capital, Darwin’s rental index remains 7.6% below its 2014 peak; a legacy of the 26.3% decline in rents recorded between March 2014 and December 2019.
Price growth compressing yields
With national housing values recording an annual rise of 22.1% compared with a 9.4% rise in rents, rental yields have decreased as a natural consequence.
Gross rental yields fell to a new record low across Australia, reaching 3.2% in December. The lowest yields, by some margin, remain in Sydney (2.4%) and Melbourne (2.7%), however, with the exception of Perth and Darwin, every capital city is recording record low yields.
The outlook for 2022
2021 was an unprecedented year for Australian housing markets, but 2022 is likely to see a further easing in the pace of capital gains. The number of home sales reached new record highs against a backdrop of below average listings and stalled overseas migration. The large majority of housing demand has originated from domestic sources, fuelled by record low mortgage rates and an accumulation of pent-up demand from prior years, when housing turnover reached record lows.
As international borders re-open, rental demand is likely to be the main beneficiary, rather than home buying demand, especially across the inner-city rental precincts popular with students and visitors.
Housing values have moved through the fastest rate of annual growth since the late 1980s at a time when wages and household incomes have hardly moved. The juxtaposition of higher housing values against low-income growth has resulted in higher barriers to entry. It is becoming increasingly hard to raise a deposit and fund transactional costs such as stamp duty. It is likely housing affordability challenges will progressively weigh on housing demand over the year ahead.