Is rental relief on the horizon?
With rental prices surging by 39% from August 2020 to June 2024, many Australians are wondering if relief is on the horizon. Recent data from CoreLogic suggests that rental growth may finally be slowing. Over the past two months, rental growth has come to a halt, marking the weakest market conditions since the early stages of the pandemic, when rents briefly declined.
While rental growth naturally slows during the middle and end of the year due to seasonal factors, the overall annual trend is also cooling down. The highest rate of annual rental growth was 9.7% over the 12 months leading to November 2021, which was a record high. Since then, the annual growth rate has slowed to 7.2%, the lowest level since May 2021.
Even though growth has slowed, most cities are still seeing rental increases that are much higher than the pre-COVID averages. Nationally, rental prices were rising at an average annual rate of just 2.0% in the ten years leading up to March 2020. The only exception is Hobart, where rental growth has fallen below its pre-COVID average due to weaker property values and slower rental demand.
Perth and Adelaide are leading the way with the highest rental growth, posting annual increases of 11.6% and 8.4% respectively. However, even these cities are experiencing a noticeable slowdown in rental growth. In Perth, for example, rents rose by just 0.7% over the past three months.
Sydney saw a decline in rents over the three months leading up to August 2024, marking the first drop in rents over a rolling three-month period since the end of October 2020, during COVID-related lockdowns. Rents also decreased in Hobart (-0.3%) and Canberra (-0.5%).
What's Driving the Potential for Rental Relief?
Affordability Challenges Could Slow Rental Growth
The pace of rental increases is likely to be restrained by affordability concerns. Between March 2020 and June 2024, Australian wages, as measured by the wage price index, grew by just 12.7%. In contrast, rental prices soared by 36.1% over the same period.
According to CoreLogic’s latest figures on rental affordability, a household earning the median income now allocates 32.2% of its gross annual earnings to cover the cost of median rent. (See table)
Such a significant disparity between wage growth and rent increases suggests that many households are increasingly stretched financially, which may dampen future rental price hikes.
Changing Household Sizes Affect Rental Demand
As rents become less affordable, household sizes are changing. Data from the Reserve Bank of Australia (RBA) shows that, during the pandemic, the average size of households in capital cities dropped from about 2.63 people to 2.53 people per home. This decrease happened as group households split up, leading to smaller households and a rise in demand for rental properties.
Now, household sizes are starting to increase again. More people are living in group or multi-generational households, so the average household size is growing. As this happens, the demand for rentals should start to ease, helping to reduce some of the pressure on rental prices.
Migration Trends and Their Impact on Rental Prices
The peak in people moving to Australia from overseas in early 2023 matched the highest rental price increases in April 2023. Net overseas migration hit a record high of 152,000 in the March 2023 quarter, but dropped to 107,000 by the December 2023 quarter—a decrease of about 58,000 people. Although migration was still higher than average compared to the decade before COVID-19, it was a significant drop from the peak levels.
The slowdown in the arrival of international students suggests that this trend might continue. Since most migrants come to Australia on temporary visas, changes in migration directly affect rental demand. With fewer migrants arriving, the demand for rental properties is likely to decrease, which can lead to lower rental price increases.
Growing Investors Activity Could Bring Rental Relief
According to data released by the Australian Bureau of Statistics (ABS), the total value of new housing loans increased by 3.9% in July, reaching $30.6 billion.
Investor loans surged by 5.4% to $11.7 billion, a 35.4% increase from July 2023, while loans for owner-occupiers rose by 2.9% to $18.9 billion, up 21.4% over the same period. First-home buyers saw a modest 0.8% increase in loan value, totaling 19.7% more than last year.
Mish Tan, Head of Finance Statistics at the ABS noted that investor loans have jumped from $8.6 billion in July 2023 to nearly a record $11.7 billion, driven by more loan approvals rather than just higher property prices. This indicates growing investor confidence and a strong demand for housing loans.
The rise in investor activity is leading to more rental properties being available, which could alleviate some pressure on the rental market and potentially ease rental prices.
Overall, the Australian property market in 2024 presents a mix of challenges and opportunities. Slowing rental growth, affordability concerns, migration trends, and increased investor activity suggest that rental relief may be within reach for some. Buyers and investors should stay informed about market dynamics to make strategic decisions.
Interested in buying an investment property? High Income Property can help you find a positively geared property in an area with strong growth potential. To discuss your options, book an online meeting or call us at (02) 8007 4001.