Why lower rental growth could have a silver lining for investors

Scott Kuru October 8, 2024 4 min read

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KEY POINTS

Rental price growth across Australia has slowed, with annual growth now the slowest since September 2021
Despite the slowdown, rental growth remains strong compared to historical standards
Slower rent growth could ease overall inflation, benefiting property investors through lower interest rates

New data from PropTrack indicates the pace of rental price growth around Australia is slowing as more available stock comes to market.

The latest PropTrack Market Insight Report says that median advertised rents rose by 7% over the past 12 months to $610 per week.

While 7% rental growth is still extremely strong, it’s the weakest annual rental price growth since September 2021.

It’s positive news for tenants - who have faced some of the steepest rent increases in a generation over the past four years.

It may seem counter-intuitive, but slower, more sustainable rental growth is also good news for many landlords and investors.

The details

PropTrack says median weekly advertised rents were $610 in the September quarter of 2024 (June, August & September), up 1.7%.

The data analytics firm says capital city advertised rents rose 1.6% to $640 per week over the quarter, while regional rents grew by 1.9% to $540 per week.

Nationally, rents have increased 7% since this time last year, year-on-year, representing the weakest annual rental growth since September 2021.

Interesting growth in unit rents (+9.1%) was stronger than annual growth in house rents (+6.9%), with the gap narrowing to just $20 per week.

Hobart, Regional NSW and Regional Tasmania were the only markets to see stronger annual rental growth over the past year.

“While the cost of renting remains higher than a year ago, the pace of price growth has slowed,” says PropTrack’s Director of Economic Research, Cameron Kusher.

“This reflects an easing of rental market pressures, which we expect to continue.”

“Sydney remains the most expensive capital city to rent a home, with the median advertised rent

unchanged over the quarter and 5.8% higher over the year, taking rents to $730 per week.”

“Perhaps surprising to many would be the fact that the median advertised rent in Melbourne at

$570 per week was cheaper than all other capital cities except Hobart.”

Bad news for investors? Hardly

On the face of it, slowing rent growth sounds like bad news for landlords and investors.

However, rental growth over the past four years has been out of all proportion when viewed in historical terms.

After flatlining with the onset of Covid from March 2020, rents took off again later that year as tenants started to look for more space in which to work from home.

Many shared houses fractured as people moved out to find their own place.

By the time Australia re-opened its international borders in early 2022, annual rental growth was already soaring, finally peaking at 10.5% in March 2023, according to CoreLogic.

Given that before Covid, annual rental growth had averaged around 2-3%, 7% is still extremely high.

As PropTrack’s Cameron Kusher points out, “Although the pace of rental growth is slowing and more stock is available for rent, supply remains low.”

And indicating that rents have reached levels where tenants are opting to move in with relatives or form new share houses, Cameron Kusher says, “the capacity to pay rent is now impacting demand.”

Rents, inflation and interest rates

CoreLogic’s Research Director Tim Lawless says the current “slowdown in market rents bodes well for inflation.”

Rent-Vs-CPI

He says it’s “clear the annual growth trend in rental costs peaked in Q1 last year (in line with the peak rate of net overseas migration), and the rental component of CPI (Australia’s official inflation measure) is likely to follow with a lag.”

As Mr Lawless points out, housing costs have the largest weight in the Consumer Price Index calculation by the Australian Bureau of Statistics, “with CPI rents allocated a 6.0% overall weight, the fourth largest weighting among the CPI sub-groups (after private motoring at 11.1%, new dwelling purchase by owner-occupiers at 8.1% and meals out & take away food at 7.0%).”

So, with rents a big part of inflation calculations, slower rent growth is helping to bring Australia’s inflation rate back down into the Reserve Bank of Australia’s target range of 2-3%.

The latest headline CPI numbers showed annualised inflation in August 2024 was 2.7%, down markedly from the 3.5% recorded the previous month.

However, much of the decline was brought about by the impact of federal and state government cost of living relief rebates, and the Reserve Bank of Australia has warned that even though the headline rate is back in its target band, it will only consider cutting interest rates when there’s real progress on underlying inflation.

Nevertheless, with rent growth falling, it’s only a matter of time before the RBA starts bringing down official interest rates from their highest point in 13 years.

With markets expecting up to four 0.25% interest rate cuts over the next year, many landlords with mortgages could be looking at much lower interest rate repayments on borrowings to fund their investments.

Slower but still strong rent growth could be a small price to pay for many investors who are currently finding themselves stretched financially when it comes to cash flow because of high interest rates.