Australia’s capital city housing markets are now clearly confronting an emerging home rental crisis, with already record high rents set to continue to increase as constrained supply falls well short of rising demand. While supply of rental properties and lack thereof is ultimately driving higher rental rate, there are some other factors at play which are likely to keep pushing them further north – which we will explore.
Firstly, it is well published that capital city home rents have surged by record levels over the past year, with tenants facing increasing financial hardships exacerbated by the highest inflation in decades (as a by-product resulting in plunging real wages).
All major capitals have recorded extraordinary annual increases in rents for both houses and units, according to the latest September data from My Housing Market. Sydney house rents increased by 18.2%, Melbourne 11.4%, Brisbane 20.2%, Adelaide 14.0% and Perth higher by 15.6%. Rising rents reflect remarkably low vacancy rates with the number of advertised vacancies falling sharply over the past year as seen in the chat below.
Median Weekly Asking Rents September 2022 (Houses)
| Rent | Year | Vacancy Rate | Annual Vacancies | |
| Sydney | $650 | 18.2% | 1.0% | -0.9% |
| Melbourne | $490 | 11.4% | 1.2% | -24.5% |
| Brisbane | $550 | 20.2% | 0.7% | -9.6% |
| Adelaide | $510 | 14.0% | 0.3% | -0.3% |
| Perth | $520 | 15.6% | 0.4% | -16.6% |
Unit rents have reported similar extraordinary results to houses over the past year with Sydney increasing by 20.5%, Melbourne 18.9%, Brisbane 10.2%, Adelaide 8.2% and Perth up by 9.8%. Rental vacancy rates for units also continue to track at record low levels with the exception of Melbourne where results however continue to decline rapidly and are now significantly lower than a year ago. It is worth noting when it comes to vacancy rates that anything below 2% is a tight rental market, and historically has led to rises in median rents – and even without critically low vacancy rates Melbourne has still seen almost 20% gains in rental values in the last year!
Median Weekly Asking Rents September 2022 (Units)
| Rent | Year | Vacancy Rate | Annual Vacancies | |
| Sydney | $575 | 20.5% | 1.2% | -54.8% |
| Melbourne | $440 | 18.9% | 2.1% | -64.4% |
| Brisbane | $485 | 10.2% | 0.7% | -57.1% |
| Adelaide | $400 | 8.2% | 0.4% | -51.9% |
| Perth | $450 | 9.8% | 0.8% | -38.9% |
Rising affordability constraints from high house rents are resulting in tenants gravitating to the more affordable unit market, with unit rental growth clearly outpacing houses over recent months – and we would expect that trend to continue for apartments in the year ahead. Sharply higher rents and modest wages growth have predictably impacted rental affordability, with house rents in the high-priced Sydney market now accounting for over 50% of average disposable weekly household income as seen in the chart below. While units aren’t much better, they remain more affordable and are likely to attract greater demand for this reason alone as the market looks for ways to tighten their belt and make savings.
Rent Proportion Average Household Income (ABS Derived)
| Sydney | Melbourne | Brisbane | Adelaide | Perth | |
| House | 50.8% | 40.2% | 46.7% | 46.0% | 43.3% |
| Unit | 44.9% | 36.1% | 41.2% | 36.1% | 37.5% |
We also need to consider the demand side of the rental market. After some 2 plus years of almost no immigration, the game is changing quickly. Demand for rentals is set to accelerate in already tight rental markets, with the resumption of significant international migration as borders are opened post-covid. The latest ABS data reveals a surge in international migration over the March quarter 2022 which is only set to intensify over the remainder of the year and into 2023, with reports also that new international student numbers are rising sharply – and all seeking local accommodation mainly through the rental market. Much of the growth in median rents has come through an environment with minimal immigration – with that now changing quickly further demand side pressure on median rents looms large.
Exacerbating the growth in rental values is the fact that underlying new housing supply remains well below demand despite last year’s surge in new house approvals generated by the previous governments HomeBuilder policy. As seen in the building approvals chart below, the market needs 180,000+ new dwellings pa to remain balanced – levels not seen since 2015-2016.
Dwelling supply across capital cities is now 26% lower than the peak recorded over the year ending August 2016 with most capitals reporting similar outcomes to the national result. As seen in the data below, most markets are 25-40% below the peak of building approvals from 2016 when it was considered a balanced market to support 200,000 immigrants a year – so this is not a problem that is going away anytime soon given the associated lead times with new projects and new dwelling developments.
ABS Annual Monthly Dwelling Building Approvals Previous v August 2022
| Sydney | Melbourne | Brisbane | Adelaide | Perth | |
| Change | -38.9% | -23.2% | -41.4% | -13.1% | -47.2% |
| Previous Peak | Sep-16 | May-18 | Apr-16 | Sep-21 | May-15 |
Currently high home building costs – again reflecting the surge in demand from HomeBuilder, are also an emerging constraint on new home building activity further exacerbating the already undersupplied nature of housing markets. The latest data from My Housing Market reveals that monthly national house building costs increased by 18% over the year ending August and although the growth rate is below the peak recorded in April, it nonetheless still represents a significant cost constraint to new building activity.
A shortage of rental properties also reflects credit restrictions imposed on residential investors over recent years and although investor activity rebounded over 2021, the current overall home lending market share still remains below long-term averages. Latest ABS data also reveals investor activity has declined over the last 4-5 months – so again there is little hope that rental property supply is going to be addressed anytime soon.
In summary, house rents are set to continue to rise within the affordability constraints of moderate wage increases and higher inflation (generating falling real wages). The main factors at play creating this unprecedented opportunity for investors, but affordability pain for renters includes:
- There is already a chronic undersupply within the capital city rental markets
- Demand for rentals is building from surging migrant demand seeking immediate accommodation
- There are ongoing significant roadblocks to new home building to relieve supply, especially from the investor market
- And the pandemic has shifted the workplace culture with huge numbers of employees now working from home permanently and seeking greater space within the home for this change driving greater demand and tightening supply (as some landlords choose to use their previous rental property for family members etc)
The bottom line is higher rents and rental shortages are clearly bad news for tenants, however landlords will continue to enjoy generally positive returns from their investments for several years to come as demand and supply forces keep pushing rents higher.
Dr Andrew Wilson – Chief Economist My Housing Market
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