Rental market conditions in Australia have tightened once again, with tenants battling record-low vacancy rates of 1% in January after a brief seasonal rise in December 2022, according to SQM Research.
Because there are only 31,500 rental properties available across the entire country, demand is surging, with the resulting competition sending rents skyward. SQM data shows a:
- 7% annual increase in the combined capital cities over the year to 12 February
- 4% rise in regional areas over the same time frame
In a recent research note, Westpac economists Pat Bustamante and Jameson Coombs said Australia’s rental marketwas caught in “a perfect storm” of surging demand and tight supply, with the price squeeze likely to get worse before it gets better.
As a result, they expect advertised rents to increase by a further 11.5% in 2023, on top of the 10% annual rise recorded over the 2022 calendar year.
If this forecast is realised, this would be the fastest annual spike in rental prices on record.
While higher rents are great news for landlords, it’s hard on tenants as there aren’t enough rental properties in Australia to keep up with demand.
So how did we get here, and what will likely happen next?
What caused the disparity between rental supply and demand?
You might be wondering how a higher cash rate will dampen inflation.
Well, higher interest rates make the cost of borrowing money more expensive. In theory, this will encourage Australians to spend less and save more, putting downward pressure on prices.
You can see this dynamic playing out not only in the property market but also in the rental market, where rising interest rates are impacting investor decisions and housing supply. Higher home loan interest rates are reducing both buyer demand and borrowing capacity. This, in turn, has seen property prices fall in many markets (though not all).
The rental market is feeling the ripple effects, with many investors holding off on purchasing new properties due to higher financing costs, which limits the availability of rental stock. As a result, the supply of rental homes remains tight, even as demand continues to surge. This imbalance in the rental market is one of the key factors driving rental prices higher, creating challenging conditions for tenants across Australia.
Where do we go from here?
One of the key causes of the current rental market squeeze occurred during the pandemic when people were working from home and wanted more living space. This shift in lifestyle preferences increased the demand for larger homes, putting added pressure on an already tight rental market.
As a result, while there were 2.59 people per dwelling in the 2016 Census, there were only 2.55 people in the 2021 Census, according to PropTrack. This might not sound significant, but smaller households increase the number of properties needed to house the population — which, in this case, translates to an extra 160,000 dwellings. This further intensified the imbalance between supply and demand in the rental market.
Furthermore, the pandemic also disrupted Australia’s construction industry, with global supply chain problems and labour shortages causing costs to skyrocket. As construction slowed, fewer homes were built, which meant the supply of rental properties failed to keep pace with household formation. This lack of new housing stock continues to put upward pressure on the rental market, driving rental prices higher across the country.
At the same time, many investors sold off their properties during the recent property boom to realise capital gains, further reducing supply in the rental market. Many of these properties have not been replaced, leaving renters with fewer options and pushing competition for available homes even higher.
To make matters worse, soaring property values during the boom also priced out many first-home buyers, keeping more people in the rental market for longer. The international border then reopened, with the return of overseas students and migrant workers adding yet more strain to what was an already tight rental market.
With demand continuing to rise and supply struggling to catch up, it’s clear that the rental market in Australia is facing significant challenges. Without swift and effective policy interventions or a surge in new housing construction, these pressures on the rental market are likely to persist well into the foreseeable future.
What happens next?
The situation is unlikely to improve until new rental properties come to market.
However, many investors are currently getting cold feet, put off by falling property prices and rising interest rates – as this Australia Bureau of Statistics graph on home loans activity shows
As a result, there exists a small window of opportunity for savvy property investors who can see past the short-term noise to the long-term gain.
Want to buy an investment property? High Income Property can help you buy a positively geared property in a location with long-term growth prospects. To discuss your options, schedule an online meeting or (02) 8007 4001