New figures have underlined the extent of Australia’s extremely tight housing market, showing rents have hit a new record high.
CoreLogic’s national median rent value registered $601 per week in December 2023.
That equates to a median annual rent of $31,252, a new record high.
The growth is extraordinary when you consider that CoreLogic calculated the median weekly rent in Australia at $437 per week in August 2020.
That means annual rent values are up by more than $8,000 in that 3-year and 4-month time frame - a 38% gain.
What’s remarkable - particularly if you are a property investor wondering where in Australia to put your money - is that there’s been strong rental growth right across the nation.
Of the 88 statistical areas that make up Australia, CoreLogic found that only 16% (or 18%) are down from historic highs.
Across the capital city markets, rents ranged from $745 per week in Sydney, to $535 per week in Hobart.
Canberra and Hobart were the only markets to see a decline in rent values through 2023, at -1.9% and -3.5% respectively.
Although home price values in Melbourne have been growing more slowly than most other cities since the onset of Covid, the strong 11.1% annual rental growth in 2023 will see a considerable improvement in rental yields for investors in the Victorian capital.
What’s driving this extraordinary rental growth?
CoreLogic’s Head of Research, Eliza Owen, points to several factors driving this explosion in rents, which has seen values grow on average at 9.1% annually for the past three calendar years.
(Contrast this to the average annual rental growth rate of just 2.0% during the 2010s.)
First, there was “a notable decline in the average household size from late 2020, partly driven by a reduction in share housing – meaning more dwellings were needed even when population
growth was close to zero in 2021,” Ms Owen says.
Second, there was the well-documented “rapid increase in the Australian population from late 2022 as international border restrictions were lifted.”
Third, Eliza Owen points to the “temporary shock” to investment housing activity between May 2022 and February 2023, as the Reserve Bank jacked up the cash rate.
“Investor activity has picked up markedly since,” she says, “but there is still a lot of catch-up required in establishing new rentals.”
Ms Owen also points to longer-term trends, such as the reduction in social housing supply.
This has “placed more pressure on the private rental market, as has a declining rate of home ownership.”
Some glimmer of hope for tenants?
This strong rental growth is obviously great news for investors, but a bitter pill to swallow for hard-pressed renters.
CoreLogic notes that rent value increases have largely outpaced wage rises, meaning rental affordability has also deteriorated.
The data analytics firm calculated that the portion of gross median household income required to service the median rent rose from 26.7% in March 2020 (at the onset of Covid) to 31.0% in September last year.
“While a far higher portion of median income is required to service a new mortgage,” Ms Owen says, “renters tend to be on lower incomes.”
“The latest data from the ABS suggests median gross household income was 41.8% lower
across renting households than owner-occupiers with a mortgage.”
In a glimmer of hope for renters, Ms Owen points out that while annual growth in rents is higher than historic averages, it has broadly slowed.
Rent values rose 8.3% last year, down from a peak of 9.6% in the year to September 2022, with the slowdown most evident across regional Australia, where rents rose 4.3% in 2023, down from a whopping 13.4% in the year to August 2021.
Rents and interest rates
CoreLogic’s latest Rental Market Update also has some interesting implications for the future direction of interest rates.
As CoreLogic’s Eliza Owen points out, “growth in the CoreLogic rent value index tends to be a leading indicator of CPI rents.”
“This is because CoreLogic rent measures are derived from advertised rents, where CPI measures rents actually paid by households.”
Rental growth is an important component of the Consumer Price Index (CPI) or inflation data from the Australian Bureau of Statistics - data the Reserve Bank of Australia relies on to see whether inflation is trending downwards, back towards the Bank’s 2-3% target.
Ms Owen says there’s usually a lag of about six quarters between the CoreLogic and CPI rent measures, but already, she says, the monthly CPI rent indicator has shown a decline from 7.6% in September, to 7.1% at the end of November.
“The slowdown in rent growth may be attributed to affordability constraints driving renters back
to share housing, or to cheaper markets,” she says.
The slowdown in rental growth is a key factor the Reserve Bank will likely consider in its interest rate decision-making when it holds its first meeting for 2024 in early February.
And in evidence that investors are returning to the property market - no doubt spurred on by impressive rental growth numbers, Eliza Owen says “the recent resurgence in investor
activity through 2023 may be gradually helping to ease supply-side constraints” for renters looking for a home.