The exponential growth of rents over the past few years has slowed, new data shows.
CoreLogic’s rental index was only 0.1% higher in July, the smallest monthly rise since August 2020. The result was due mainly to falls in Sydney and Brisbane (both down 0.1% in the first monthly decline since 2020) as well as Hobart, where rents fell 0.3%.
A clear slowdown across the unit sector has been the main influence on rental growth, especially in Sydney where the annual change in unit rents has dropped from 17.9% in May last year to 6.6%. Melbourne and Brisbane unit rents have also lost more than 8 percentage points in the annual growth rate.
It should be noted, however, that the slowdown is off a high base. Despite the slower rate of annual growth, Sydney unit rents still rose by 6.6% over the past 12 months, which is more than double the pre-COVID decade average (2.7% annual growth).
Corelogic research director Tim Lawless observed that the easing in rental growth aligns with the peak in net overseas migration in the first quarter of 2023.
“The large majority of overseas migrants, mostly students, arrive in Australia on temporary visas. Housing demand from overseas migration tends to favour inner city unit rental markets”, Lawless said.
Growth in house rents is also easing in most cities, but again this is from a high base with the annual pace of rental growth remaining well above pre-COVID averages in most cities.
“With value growth outpacing rental growth we could once again see some downwards pressure on gross rental yields”, Lawless suggests.
“The spread between investor mortgage rates and gross rental yields has widened significantly since the commencement of the rate hiking cycle: in April 2022 there was only 1 basis point difference between national gross rental yields and variable mortgage rate for investors.
“Since then the spread has widened to 294 basis points in July, implying opportunities for positive cash flow have become increasingly scarce.”
Corelogic’s research shows that an underlying mismatch between housing supply and demand looks set to support housing prices through the second half of the year, however there does seem to be some rebalancing underway.
Real estate listings have been flowing onto the market at a pace slightly above average through autumn and winter, which has been testing the depth of buyer demand. At a macro level, demand has been deep enough to absorb the higher level of advertised supply, but pockets of weakness are emerging. Listings numbers are now well above average in Hobart and Melbourne and are normalising in Sydney.
In the three months to July, CoreLogic estimates there were approximately 125,000 sales across Australia, a little higher than the 121,000 new ‘for sale’ listings added to the market in the same period. This suggests there were still more buyers than sellers in the market, but sales and listings are more finely balanced than the same period last year, when there were 123,000 sales against just 112,000 new listings.
Beyond the number of homes available to purchase, the supply of newly built homes remains insufficient relative to population growth. A further 6.5% drop in dwelling approvals through June highlights the challenges faced by the residential construction sector. Profit margins have been compressed, skilled trades are scarce and holding costs remain high.
“On the positive side, we are now seeing residential construction costs rising at the slowest annual pace in 22 years”, Lawless said. “Although the cost to build isn’t reducing, the slower pace of growth should provide builders some confidence that project costs won’t blow out.
“Additionally, with established housing values rising almost three and half times faster than construction costs, profit margins should gradually repair.”
The data also shows that investors are taking a larger share of demand. A key trend emerging from ABS lending indicator data is the upswing in lending for investment purposes. Nationally, the number of investor loans are up 24.8 per cent on last year and the value of lending to investors has jumped 29.5 per cent over the year to comprise 37.1 per cent of mortgage demand. In WA, where home values have jumped 23.9 per cent over the year, investor lending is up 53 per cent, more than double the national average.
“Investor demand tends to seek out capital growth, so it’s no surprise to see such an upswing in markets like Western Australia and Queensland where values are rising rapidly and yields tend to be higher than the larger capitals”, Lawless said.
“However, the share of investment demand is well above average at a time when rental yields are tracking substantially lower than mortgage rates, implying a rising number of investors are likely to be experiencing a cash flow loss, especially if they are highly leveraged”, he concluded.
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