Brutal rental market outpacing inflation but glimmer of hope emerges

Rents are still rising at almost double the pace of inflation in many parts of the country but the days of extreme rent hikes may be receding into the rear view mirror’s distance.

High interest rates have contributed to the record rents seen in most capital cities in 2023 but inflation data released Wednesday (10 January) offers hope that the heat will come off in 2024.

Inflation has climbed down from its peak of 8.4 per cent in late 2022 and dropped a further 0.6 per cent this quarter to 4.3 per cent, meaning the Reserve Bank of Australia is likely to hold off raising the official cash rate, which in turn should ease the burden on property investors who pass on higher costs to tenants.

But renters are still struggling and any turnaround in their fortunes will be slow in coming to fruition.

Rent prices rose 7.1 per cent in the 12 months to November, way higher than the consumer price index (CPI), reflecting low vacancy rates and a tight rental market. 

Weekly house rents for the combined capitals ended a record-breaking stretch of 10 consecutive quarterly increases, according to the Domain Rent Report December Quarter 2023.

Similarly, Melbourne houses and units, along with Sydney units, have also broken their longest streak of rises.

But as of the end of 2023, asking rents still sat at record highs across the combined capitals ($600 median weekly asking rent for both houses and units) and all cities apart from Canberra houses and Darwin and Hobart unit rents.

In the face of these price records, the slowing growth in rental asking price is still good news for renters who have been slammed over the past few years with huge annual rent hikes.

The seasonal lift in vacant rentals as the rental market moves into the changeover period has pushed up the vacancy rates across most capital cities, with Sydney (1.3 per cent), Melbourne (1.2 per cent) and Brisbane (0.9 per cent) sitting at a roughly 12-month high, a 3.5-year high in Darwin (1.7 per cent), and the highest on record in Canberra (2.0 per cent).

The picture in Adelaide and Perth, however, remains bleak for renters. Both are at 0.4 per cent and have been below 1 per cent for more than three years.

New South Wales is in the midst of an extreme rental crisis, the likes of which we’ve not experienced in decades.

- Tim McKibbin, CEO, REINSW

With the overall seasonal boost in rental supply, Australia now needs between 30,000 to 60,000 additional rentals to shift to a balanced market (a vacancy rate of 2-3 per cent) - a significant improvement from September’s estimate.

Dr Nicola Powell, Domain’s Chief of Research and Economics, said the rental market may have turned a corner over the December quarter.

“Looking ahead, several factors are slowing rental growth — stretched affordability, more renters opting for house shares, and a slow return of investors over 2023.

“They will continue to play out in 2024 and we are also likely to see some renters transitioning to homeownership with the new first-home buyer incentives in place, such as Queensland doubling the first-home buyer grant and the anticipated federal government’s Help to Buy shared equity scheme, along with a potential interest cut that will improve borrowing capacity and mortgage affordability.

“We forecast a tipping point to be reached at some stage this year, marking a return to a more balanced rental market.” 

She added that to alleviate Australia’s housing crisis long term, further solutions need to be activated.

“Build-to-rent provides a significant amount of rental housing supply at scale and speed.

“With the cost of home ownership becoming more and more expensive in major cosmopolitan cities, it can act as a key circuit breaker for housing affordability,” Dr Powell said.

REINSW: ‘Worst rental market in decades’

Units in Sydney, Melbourne and Brisbane have seen particularly sharp increases in the past year, up 15 per cent to 17 per cent, according to PropTrack data.

Perth has seen the fastest rent growth over the past year and median advertised rents are now up 66 per cent compared to pre-pandemic.

In contrast, regional rental markets have seen more moderate growth. Rents were flat across regional areas in the December quarter and have been stable at $500 per week since June.

PropTrack Economist Angus Moore said rental markets remain extremely challenging for renters.

“Rents are growing at double-digit rates in many capitals but there are some signs that rent growth may be slowing, and some relief on the horizon.

“While rents are still growing very quickly, rent growth in 2023 was slower across the combined capital cities compared to 2022.

“As we head into what is typically the busiest time of year for rental markets in January, renters will, unfortunately, continue to face growing rents,” Mr Moore said.

REINSW CEO, Tim McKibbin described New South Wales as “in the midst of an extreme rental crisis, the likes of which we’ve not experienced in decades”.

“Demand for rental accommodation certainly isn’t slowing, but the number of properties in the supply pipeline is, as cost-of-living pressures continue to force landlords to sell their investment properties,” he said.

“The inevitable knock-on impact is fewer properties available in the rental pool.”

Housing expenses and rents continue to weigh heavily on the nation’s inflation outlook. Across most categories of goods and services, there was a reduction in inflationary pressures with the exception of rents.

Master Builders Australia Deputy CEO, Shaun Schmitke, said a lack of enough new housing supply continues to impede the battle against inflation.

“Inflation is a productivity killer; there is clearly a need for renewed urgency to tackle high costs and labour shortages in the building and construction industry.”

He said Master Builders strongly opposes the 'Closing Loopholes' workplace reforms impacting independent contractors.

“Complicating contractor engagement and making it harder for trades to move between projects ultimately drives up construction costs,” Mr Schmitke said.