Sometimes, the media can be sensationalist with the way they report property news. However, in the case of Australia’s rental markets, the media is absolutely spot on in describing them as “crazy.” The reality on the ground is that the rental market is experiencing an unprecedented surge, and it’s hard for anyone to ignore. With tenant demand reaching record levels, many individuals are struggling to find affordable accommodation.

What’s happening with our rental markets is unlike anything we’ve seen for many years, with tenants facing intense competition for available rental properties and rental rates soaring to new highs. The pressure on renters is so high that many are forced to consider less desirable options or even relocate to areas they may not have initially considered. Meanwhile, property investors are reaping the rewards of this competitive landscape, with increasing rents and fewer vacancies in the market.

To truly understand what’s driving the current situation in Australia’s rental markets, we need to focus on one crucial factor: rental vacancies.

Rental vacancies are the number of available rental properties that are not occupied by tenants. When vacancy rates are high, renters have more choices, and landlords must offer more attractive terms to secure tenants. Conversely, when vacancies are low, renters face fewer choices, and landlords have the upper hand. This has been the case in Australia for quite some time, as vacancy rates have steadily dropped, particularly in popular urban areas.

Over the past year, the vacancy rate has fallen to historically low levels, leaving renters with fewer options. In many cities, such as Sydney and Melbourne, vacancy rates are now below 1%—which is extremely tight for renters and points to a rental market that heavily favors landlords. This drastic reduction in vacancies has been one of the key drivers behind soaring rental prices.

In August 2021, there were 58,856 vacant rental properties in Australia, according to SQM Research. By August 2022, that had plummeted to just 36,741.

At the same time, there was a corresponding reduction in the ‘vacancy rate’, or the share of empty rental properties, from 1.6% to 0.9%.

To put that in context, anything above 3% is regarded as a tenant’s market while anything below 2% is regarded as a landlord’s market (with anything in between regarded as a balanced market). So a change from 1.6% to 0.9% reflects a change from landlords holding the upper hand to landlords holding a position of dominance. That means:

• Tenants are competing fiercely for rental properties
• Landlords are finding it easy to fill vacancies
• That’s allowing them to choose high-quality tenants
• It’s also allowing them to increase rental rates

Over the year to 20 September, median rents increased 13.4% for houses and 12.3% for units, according to SQM Research. As you can see in the graph, that sort of increase is very unusual in the current rental market.

Rental supply v demand

In any sort of market – whether for oil, wheat, or property – there’s an interrelationship between supply and demand:

• When supply goes up, demand goes down
• When supply goes down, demand goes up

In the rental market, as we’ve seen, supply has gone down, which is why demand has gone up.

This one-sided rental market is unlikely to return to balance anytime soon, because, amazingly, supply is trending down while demand is trending up.

In the year to July (the most recent month for which we have data), residential building approvals fell 25.9%, according to the Australian Bureau of Statistics. That means fewer homes will be built in the future. And we’ve all heard the news about construction companies struggling to source supplies and going bankrupt – which will also lead to fewer new home builds. So less new supply will come on board.

Meanwhile, now that the international border has reopened, foreign students are flooding back to Australia. Immigrants are also returning to Australia – and the federal government recently increased the permanent migration intake from 160,000 places per year to a record 195,000. The vast majority of those students and immigrants will be renters, which is why demand for rental accommodation is set to increase further in the rental market.

Most investors believe now is a good time to buy

Given that we’re in a landlord’s market and things are unlikely to change anytime soon, many property investors are in a strong position right now. This is why a lot of investors are thinking about buying in the near future.

The PIPA Annual Investor Sentiment Survey 2022, which was conducted in August, found that 59% of investors believed now was a good time to invest in residential property, while 19% felt it wasn’t and 22% were unsure.

Want to take advantage of the current rental market by buying a quality rental property? High Income Property can help. To discuss your options, schedule an online meeting or call (02) 8007 4001.