Rents Continue to Surge!

As we know, there are two sides to the residential property market: the owner occupier market and the investor market.

With sales prices falling across the board, it is interesting to note that rents continue to climb. With this in mind it would be easy to presume that investors would now be coming back into the marketplace in the knowledge that not only have purchase prices fallen, but rents are continuing to rise. Unfortunately this has not yet happened.

As a clear indicator as to just what has happened with availability in the investment property space, less than three years ago, just 15% of the overall residential sales in Australia were investors selling an investment property. Late last year, that number had risen to 27% of all sales as investors cashed in on the huge capital gains as prices surged across the Nation.

The end result of this sell off of investment properties has been that the available rental pool has decreased dramatically and the flow on effect has been skyrocketing rental prices.

The time for investors to re-enter the marketplace appears someway off so unfortunately it does appear that the situation is likely to get worse for tenants before it gets better.

With this in mind, the Australian Financial Review released an article last week quoting the Westpac Bank who this week predicted a further rise of 11% in rents over the 2023 calendar year.

The full AFR article and Westpac's findings are below.

Rents to rise 11pc before peaking early next year: Westpac

Soaring residential rents are unlikely to peak until early next year as the chronic shortage of rental homes amid surging migration is expected to persist over the next 12 months, according to Westpac.

Westpac Business and St George senior economist Pat Bustamante said the current rental crunch was likely to be longer and more severe than the previous cycles as demand vastly outpaces supply. 

“Given the current supply and demand dynamics, and the lag in supply, the peak would likely take longer than people expect,” Mr Bustamante told The Australian Financial Review.

“The return of migrants and international students is providing an important injection of labour supply, but it’s also putting a further strain on the rental market.

“Unlike the previous cycles, we’re not seeing the supply response because interest rates are increasing and there’s also a lag between approvals and construction, which means we’re unlikely to see a reasonable amount of new supply until the middle of 2024.”

Westpac predicts advertised rents to rise by 11.5 per cent this year, the sharpest annual increase on record. This would take the average asking rent nationwide to $633 a week, or an additional $65.

“This could be enough to entice investors and developers back into the market, which would ease the supply crunch,” Mr Bustamante said.

“We expect this to happen towards the end of 2023 in some pockets, only after further rent hikes.”

CoreLogic head of research Eliza Owen said the 1.3 million returning overseas arrivals in 2022 have exacerbated the rental shortage.

“Long-term overseas migrants largely rent when they first come to Australia, adding to demand and short-term visitor arrivals will also require accommodation, which might draw more investors away from the long-term rental market to take advantage of tourism demand,” Ms Owen said.

“There may be another demand surge as China moves away from zero-COVID, particularly in the second half of the year.”

Westpac estimates that about 70 per cent of migrants enter the rental market, and it will take them around four to seven years to buy a home.

Mr Bustamante said the rapid increase in migration numbers and extremely low rental vacancy rates had lifted annual increases in advertised rent at a rate not seen in over a decade, since the mining investment boom.

“Already, we have seen advertised rents growing at over 10 per cent annually and we are only at the beginning of the rental shock,” he said.

”Plus this time, we are not expecting to see the same supply response as in the late 2000s. This time around, we have strong migration and population growth, but interest rates are on the up, and there’s a risk they could remain elevated for some time (depending on how inflation evolves).

“This will delay and dampen any supply-side response, prolonging the shortage in rental properties.”

Suburbtrends director Kent Lardner said market indicators of vacancy rates and supply were all pointing towards rent rises in almost every suburb.

“This is universal. In previous years we could always find higher vacancy rates in select regions or in the higher density city locations,” he said.

“Today I counted just eight out of 336 areas with vacancy rates over 3 per cent. I’ve never seen anything like this. And when you add the very grim pipeline supply, it is hard to see anything other than a rental crisis for the next four to five years.”

Please see below a graph showing the overall increase in investment properties being sold since 2019.