October 30, 2024 by Dymphna

CBA reveal their outlook for rental market

CBA roll the numbers forward on the rental market

CBA now reckon that “the worst of the rental squeeze is now behind us,” and rents will return to more regular rates of growth.

Not that they will start falling necessarily. Just that we’re not going to see the explosive rates of rental growth that we’ve seen post-Covid.

So less like 10%, and more like 2-3%.

If you’re investing on the assumption that rents are going to keep up their recent pace of growth, you might find yourself getting into trouble.

CBA note that rents were flat in September, and the annual rate of growth is slowing:

In September, asking rents were flat in the month and 6.7% higher through the year. The annual rate of growth is down from a recent high of 10.0% in March this year.

8-city rents

Annual growth rates are trending lower across all of the five largest cities in Australia.

In Sydney, the largest rental market in the country, asking rents fell by 0.1% in the September quarter. Over the last few months, the rate of growth looks to have stepped down more materially.

CBA reckon there’s two main drivers of the easing in rental market conditions.

First, Aussie are ‘economising on housing costs’ by increasing average household size – putting more people in together.

Second, population growth is slowing, which also helps ease pressure on the demand side.

There was a bit of a stretch out during Covid, as people added home offices, and the average number of people per dwelling fell. That now seems to be reversing:

Given high costs, household behaviours are changing to economise on housing: more people are living in share houses, and fewer are living with just their partner, based on data from the monthly labour force survey.

The RBA also recently commented that average household size is increasing, supporting this view.

We’re still some ways off returning to pre-Covid levels, so to my mind, that does open up the possibility that a soft patch in rental growth could continue for some time.

On the population side of the equation, CBA note that net overseas migration (NOM) continues to ease.

CBA note that there is “a strong historical correlation between the deviation from the mean of ratio of population change to multi-unit dwelling completions and rents inflation.”

That’s kind of a fancy way of saying that when we don’t build enough apartments, relative to population growth, rents go up. Rolling the correlation forward, this is what it looks like:

That is, rental growth is likely to return to a more historically normal 3% in the years ahead.

But a key point here is that this easing of conditions is coming through the demand side, which has the potential to be more fickle (immigration could rebound at any moment, for example.)

On the supply-side, conditions remain very tight.

Anyway, that’s CBA’s outlook for the rental market, and it seems pretty sound to me.

Normal times are set to return (as they always do.)

DB