- The national rental index has had its smallest monthly increase this year
- The month to September 2022 saw 0.6% rise in the index, compared to a peak of 3% in May
- Brisbane recorded a 3.8% rise in its index, while Canberra recorded a -0.1% decline
CoreLogic has today released its Quarterly Rental Review for Q3 2022 report which shows that the national rental index has had its smallest monthly increase this year, up 0.6% in the month to September 2022 and 2.3% over the September quarter.
The report also showed this is a 60- basis points decrease compared to the three months to June (2.9%), and 70 basis points below the recent peak rate recorded in May (3%).
Kaytlin Ezzy, CoreLogic Research Analyst and report author, said that despite the slowdown in the monthly and quarterly rate of growth, the annual growth trend held steady at 10% in August and September, a record high.
“The past few years has seen unprecedented growth in rental values,” she said.
“We saw rents fall marginally over the first few months of COVID, but, since August 2020, national dwelling rents have surged almost 20%, equivalent to a weekly rent rise of approximately $90 per week.
“Initially driven by a reduction in the average household size, the continued upswing in values is likely now predominantly being driven by the strong return of overseas migration, coupled with extremely tight rental supply.”
“The slow down in the rate of rental growth may suggest an increasing number of prospective tenants are starting to come up against affordability constraints,” she said.
“As high non-discretionary inflation, along with increasing rents put additional stress on a renter’s balance sheet, it is likely a growing number of tenants look to reform larger households or find more affordable rental options in an attempt to reduce costs.”
Kaytlin Ezzy, CoreLogic
The findings have been described as surprising, given how low the vacancy rate is nationally.
The total supply of advertised rental stock is more than a third below the previous five-year average.
Nationally dwelling vacancy rates tightened from 1.3% in June to 1.1% in September.
“One factor which has likely negatively impacted rental supply is the decline in investor purchasing activity between early 2017 and early 2020,” Ms Ezzy said.
“Through this period, a mix of temporary changes to mortgage lending conditions, and the uncertainty surrounding the onset of COVID-19 limited residential property purchases.
“Additionally, CoreLogic recorded an increase in investor-owned housing stock being listed for sale through 2021 and into 2022, with many investors possibly looking to maximise capital gains through the upswing.”
Capital cities vs regional rents
The CoreLogic report noted that rent growth across the combined capital cities continues to outpace rents across the combined regionals.
Ms Ezzy said this trend is predominantly due to the return of overseas migrants, who choose to rent in high-density areas such as Sydney and Melbourne upon arrival.
Rental growth in the capitals is up by 2.7% and 1.3% across the regions.
“While both markets saw the pace of quarterly growth ease compared to the June quarter, the decline in the rate of growth seen across the combined regional markets was significantly stronger,” she said.
“However, despite the easing growth trend, rental availability in both markets remains extremely tight, with the capitals recording a monthly vacancy rate of 1.1%, while just 1.0% of regional rental properties were observed as vacant in September.”
Who are the best and worst performers?
Brisbane recorded the strongest quarterly rise in dwelling rents (3.8%), although the pace of growth is slower compared to the 4.2% growth recorded during the three months to August.
Darwin and Adelaide both recorded a 3.6% increase in rental values over the quarter.
Sydney, Perth and Melbourne saw dwelling rents rise by 2.9%, 2.5% and 2.3% respectively.
Hobart recorded a minor rise of 0.4%.
Canberra bucked the trend, with dwelling rents declining by -0.4%.
Despite this, Canberra remained the most expensive city in Australia to rent, with a median weekly rental value of $682. Sydney ($665), Darwin ($590), and Brisbane ($573) followed.
Melbourne remains the most affordable capital city to rent in at $495 per week, followed by Adelaide ($508), Perth ($533) and Hobart ($551).
“With Sydney recording strong rental growth at a time when rents are declining across Canberra, the gap between Australia’s two most expensive rental markets has narrowed to just $17 per week,” Ms Ezzy said.
“Given international migration is expected to continue to support rental demand across Sydney while affordability is expected to hamper Canberra’s rental growth, it’s likely we’ll see Sydney overtake Canberra as Australia’s most expensive capital city rental market in the coming months.”
With rental values rising as housing values depreciate, gross rental yields continue to expand.
National dwelling values fell -4.1%m while rental values rose 2.3, resulting in a 3.57% dwelling yield.
Although these yields are above the record lows recorded in February (3.21%), they are below the 4.24% pre-pandemic average.
“With interest rates expected to continue rising throughout the first half of 2023, it’s likely we’ll see further downwards pressure on housing values,” Ms Ezzy said.
“In this scenario it is likely rental yields will continue to improve with the combination of continued rental growth and falling values being a potential catalyst for national dwelling yields to return to long-term averages, which could help offset the highest mortgage costs investors are facing.
“Once interest rates have stabilised, higher yields coupled with lower values and stronger buying conditions, could entice more investors to enter the market, which would ultimately help raise rental supply.”
