Some tentative signs the rental market is slowing. It’s a false flag.
Are rents going to slow down?
Are enough people going to get so sick of renting that they decide to buy, and we see a surge of demand that pushes property prices higher?
These are the questions I’m asking myself right now.
Because rents have been on an absolute tear-away.
Rental vacancies have completely collapsed, and remain rock-bottom at 1.1%. It’s not even conceivable that they could go much lower than that.
Every capital city saw a decrease in total rental listings in August, reinforcing longstanding concerns about a lack of rental supply.
Despite the tightening in the rental vacancy rate, the national rental index increased by 0.5% in August, the 36th consecutive month of increases, but the smallest month-on-month rise since November 2020:
Given the ongoing tightness in the vacancy data, its not clear why the pace of rental growth should be slowing.
Maybe they just can’t go any higher.
National rentals rose 9.0% year on year in August, the slowest annual rate of growth since April 2022, but still nearly three times higher than the decade average of 3.2%.
Most areas of the country are losing momentum in terms of rental growth, but certain locations are defying the trend.
Annual rental increase in Melbourne reached a new high of 11.9% over the year, while the rolling quarterly trend has been declining since May.
Similarly, the annual rent increase for Perth units has reached a new cyclical high at 16.4%.
Maybe renters are hitting the upper limit of what they can afford to pay, which is also reflected in the strong rise in tenants living in group housing.
But do they have a choice? Immigration is surging back, and the vacancy rate is not improving anytime soon.
It is conceivable to me that the rental market gets even more competitive, and it eats further into renter budgets.
Westpac agrees. With little new supply in train, rental prices will have to go higher:
Rental markets provide a vivid depiction of how the collision of surging physical demand and insufficient supply is affecting Australia’s housing sector.
Record low rental vacancy rates and double-digit growth in asking rents speak to the intensity of pressures. Unfortunately, most indicators suggest the squeeze has longer to run with additional supply unlikely to come onto the rental market anytime soon.
But one of the questions I asked at the start is would this lead to a surge in new-home-buyer demand?
Westpac doesn’t think so. They note that the rent-or-buy calculation has gotten worse in recent months, as the rise in borrowing costs offsets the rise in rents.
Lastly, it is worth considering the extent to which rising rents may be driving more renters to become owners. The scope here looks to be very limited.
Chart 17 shows measures of the buy vs rent decision for the major capital cities, split by houses and units and expressed as a deviation from long run averages.
While the cost of renting has risen rapidly, the cost of purchases have risen by even more due to higher mortgage interest rates, especially for houses.
Compared to history, switching from renting to owning is a bigger stretch than usual, Perth units being about the only exception.
Again. I’m not so sure.
I think we might be approaching a whatever-it-takes market, with renters looking to escape the rental market by hook or by crook.
But whichever way you cut it, it all going to put upward pressure on prices.
DB.