Rental Report 2023

What is happening in rental markets?

What is happening in rental markets?

Accessible and affordable housing is vital for a healthy society and strong economy.

In Australia, more than a third of households choose to rent their homes, making the rental housing market a significant factor in shaping our communities and economy. Surprisingly, over 80 per cent of tenants lease their home from “mum and dad” investors who typically own just one investment property.

Over the past two decades, the rental landscape in Australia has undergone a significant transformation. The demand for rental properties has grown, accompanied by a notable increase in the proportion of households renting rather than owning their home. ABS Census data indicates that in 2001, approximately 27 per cent of households were renters; by 2021, this figure had risen to around 33 per cent. The number of rented homes increased from 2.2 million in 2011 to 2.8 million in 2021, a 24 per cent growth. This trend can be attributed to changing economic conditions, demographic shifts, population changes and housing affordability.

The latest ABS Census data also shines a light on the evolving demographic profile of renters in Australia. Renting is no longer predominantly associated with young individuals and couples alone. The data reveals a more diverse renter profile, encompassing families and older Australians, as housing affordability challenges have made renting a more viable and attractive option for a broader range of individuals and households.

Gaining a comprehensive understanding of the dynamics that drive the rental housing markets is essential to help develop policies, regulations, and solutions that ensure the housing market is accessible and provides affordable options for all.

State of the Market

The current rental market in Australia is currently facing a range of challenges but is broadly characterised by an unhealthy imbalance between demand and supply. Surging rental demand, from demographic and population changes, and limited availability of new and existing properties, has seen vacancy rates fall and rents significantly increase.

Demand - More tenants seeking properties in a broader geographic area

Since the beginning of 2020, rental demand in Australia has experienced significant fluctuations, influenced primarily by two factors: overseas migration and changing household dynamics. Initially, as the pandemic took hold, there was a decline in rental demand as young singles and couples moved back home, and non-residents and international students returned to their home countries. However, as time went on, there was a shift in tenant demand, with individuals seeking their own living spaces away from parents or flatmates. This led to a search for small apartments or larger houses with additional amenities like backyards and studies, catering to the needs of isolation and remote working.

This trend saw household sizes begin to fall. According to a report from the Reserve Bank of Australia (RBA), the decline in average household size since the beginning of 2020 contributed to the formation of approximately 120,000 additional households. As a result, this created additional demand within the rental market.

Additionally, as borders reopened, international students began to arrive, skilled workers returned, and residents came back to fill work shortages. This turbo charged demand for rental properties, particularly in the inner-city apartment markets. According to the latest data from the Australian Bureau of Statistics (ABS), Australia’s population grew by 1.9 per cent or 496,800 people in 2022, the fastest pace since 2008. Over the course of the year, there were 619,600 overseas arrivals and 232,600 departures, resulting in a net migration of 387,000 on top of the natural increase (births minus deaths) of 109,800 people.

Supply – Low vacancies with a challenging outlook

Supply-side factors have also played a significant role in shaping current rental market conditions.

At the onset of the pandemic, economic and regulatory uncertainties prompted some investors, especially those in holiday markets, to sell their properties. While the subsequent property market upswing did assist in the recovery of some of these properties, the overall rental stock did not bounce back above pre-pandemic levels.

More recently, rising financial cost pressures, driven by higher interest rates, have acted as a deterrent for investors looking to enter the market at the same pace as the demand from tenants, despite more attractive rental yields on offer.

Unfortunately, the outlook for new housing supply is not positive. The number of new dwellings being approved continues to decline and high construction costs, a shortage of skilled tradespeople, and increased financing costs have put pressure on developers’ and builders’ margins, leading to a slowdown in construction times and insolvencies. The latest ABS dwelling approvals data highlights this issue. Total approvals are currently down -24 per cent compared to last year, with new house approvals down -18 per cent and unit approvals down -35 per cent. Total dwelling building commencements are also down -21 per cent compared to last year.

A slight silver lining is that there is evidence that selling investors have started to re-enter the market to purchase new rental accommodation; however, sales listings remain at very low levels, down -15 per cent compared to last year, and higher interest rates are outpacing the potential returns, so we don’t expect a significant bounce in vacancy rates that will slow rental growth in the short term.

Rents – Growth driven by demand / supply imbalance.

The significant imbalance between supply and demand has resulted in a sharp decline in vacancy rates and a considerable increase in rental prices.

While all capital city and regional markets have seen rents rise, some have increased higher and faster than others. According to CoreLogic, rental prices have surged by 9.9 per cent over the past year, with capital cities experiencing higher growth at 11.7 per cent compared to 5.4 per cent in regional markets.

During this time, Sydney witnessed a rise of 13.2 per cent in rents, driven primarily by a massive 19.3 per cent growth in unit rents. Brisbane also experienced strong growth, with an average rent increase of 11 per cent, led by a 16.4 per cent rise in unit rents. However, Canberra is an exception, with rents declining by -1.9 per cent, mainly due to a significant drop of -3.2 per cent in house rents.

Vacancy rates have followed the demand and supply dynamics. According to SQM Research, in April 2020, vacancy rates peaked at 2.9 per cent nationally, with 88,000 properties listed as available for rent. Similarly, Melbourne faced a peak vacancy rate of 5.6 per cent in December 2020 due to government-imposed lockdowns and restrictions.

Over the past year, demand pressures have seen rental vacancies fall to 1.2 per cent, with approximately 36,000 properties available for lease. Perth and Adelaide, in particular, have remained tight with a low vacancy rate of 0.6 per cent, and around 1,000 properties available for lease in each city.

Looking ahead, the rental market is expected to continue to experience strong rental price growth due to the slow pace of new home construction and solid population growth.

Source: CoreLogic

What is happening in rental markets?

What solutions are being talked about?

To ensure a sustainable and equitable rental market, it is crucial to adopt a comprehensive approach that addresses the underlying factors contributing to rental market challenges. Rent freezes and rent caps have been discussed as potential solutions; while they provide short-term relief for tenants, they come with longer-term negative consequences that need to be considered.

Source: CoreLogic

1. Rent freezes, which freeze rental prices at their current levels, can temporarily relieve tenants. However, they typically apply to existing lease agreements, leaving tenants without contracts or on month-to-month agreements unaffected. This can limit the benefits to a significant portion of renters. Moreover, rent freezes may discourage landlords from investing in property maintenance and improvements, potentially leading to declining rental property quality over time. Rent freezes may also disincentivise landlords from offering long-term leases or renewing existing ones, reducing the security of tenure that many tenants seek.

2. Rent caps, which limit the maximum allowable rental increase, aim to control rental price growth. However, rent caps can discourage landlords from entering the rental market or investing in new properties, potentially reducing the housing supply. They may also result in landlords neglecting property maintenance or opting for short-term rentals within the capped limits, impacting the quality and availability of rental housing, particularly in high-demand areas with limited supply.

What is happening in rental markets?

What other solutions are there?

To address rental market challenges, solutions should focus on increasing the housing supply. This involves maximising the utilisation of existing homes and constructing new ones that are of high quality, suitable in size, and located in the right areas.

1. Governments can directly fund or build homes, acting as developers or financing private developers to build new homes. This would ensure a constant and consistent supply of homes being built, particularly in softer periods of the market cycle where constructing and selling new homes is not financially viable for private developers. One model to look at here is Defence Housing Australia, which provides long-term stable accommodation for defence families.

2. Increasing the supply of social, community, and affordable housing is required, particularly in the less affordable inner-city areas and rapidly growing regional markets. This will support disadvantaged individuals, low-income earners, and essential workers while contributing to the economic sustainability of these areas.

3. Planning and development incentives should align new housing supply with population growth, prioritising locations with tight labour markets and low rental vacancies. Incentives to build in fast-growing regional areas are also necessary. These areas need help supplying new housing quickly due to the limited number of builders and tradespeople in these areas.

4. Incentivising long-term leases can provide security and stability for tenants. Landlords could be encouraged to offer long-term, multi-year leases, similar to commercial-style leases, typically span 3, 5, 7, or 10 years. Commercial leases also outline any rent increases over the term and include make-good clauses that allow tenants to change the interior while ensuring the property is returned to its original condition upon expiry. Such measures provide certainty and security for both tenants and landlords.

5. Increase Build-to-rent incentives for large-scale builders and institutions to construct rental accommodation specifically to rent. This approach can increase the availability of rental properties and provide long-term rental options for tenants.

6. Balancing short-term accommodation with the need for permanent long-term housing is crucial to support regional centres’ tourism industry while ensuring affordability and the vacancy needed for the long-term local population, which is essential for sustaining the businesses that serve tourists.

By implementing a diverse and comprehensive strategy that focuses on housing supply, affordability and stability, the rental market can become more sustainable, equitable and responsive to the demographic shifts and the growing population Australia faces.

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