Rents flat in June quarter as consumer sentiment remains low

Rental prices grew by just 0.7% during the June quarter despite low vacancy rates, with new Australian Property Monitors figures showing landlords held off from raising rents due to low consumer sentiment and weak economic data.

But APM economist Matthew Bell says as leases begin to expire, a strong labour market will mean rental prices will begin to increase towards the end of the year.

The figures for the June quarter reveal prices grew nationally by 0.7%, with annual growth at a lower-than-expected 3.1%. Units, which performed particularly well in Melbourne and Sydney, recorded 3.5% growth for the quarter.

Housing rents grew by 4.3% in Sydney in the June quarter, and by 2.3% in Canberra, to a median of $460 and $415 respectively. However, they were the strongest results. Darwin fell by 5.5% to $480, with Adelaide also falling by 1.5% to $310.

Melbourne and Brisbane both recorded falls of 1.4% over the June quarter, with Perth and Hobart both remaining stagnant. The highest yearly growth was recorded in Canberra, at 8.4%.

The unit market performed slightly better. The highest growth in the quarter was in Sydney at 4.8%, followed by Melbourne at 2.9% and 1.9% in Canberra and Adelaide. However, prices fell by 6.3% in Darwin, and by 1.4% in Brisbane.

Darwin recorded the highest yearly growth of 12.5%, followed by Sydney at 4.8% and Melbourne at 4.5%.

Bell points out that due to higher vacancy rates in Brisbane and Perth, growth in those two cities are low compared to Sydney and Melbourne, where vacancy rates are relatively low.

Meanwhile, gross rental yields for houses are also performing poorly. Every major city has recorded a decline, with the largest being a 7% fall in Melbourne to just 4.16%. Brisbane recorded a 5.3% drop to 4.71%, while Perth recorded a 5.1% drop to 4.27%.

Rental yields for units weren’t much better, with Darwin recording a yearly drop of 9.4% to 5.63%. The next largest drop was in Melbourne, which recorded a 6.7% decline to 4.77%.

“Gross rental yields have fallen in all capitals in the 12-months to June as property price growth outstripped rental growth for the majority of the period. In the June quarter, rental yields increased in most capitals, with the largest increases in Melbourne and Darwin, where price growth has slowed most noticeable,” Bell says.

“With the outlook for price growth softening for the remainder of 2010 and with rents expected to return to growth, yields are expected to start rising slightly for the remainder 2010.”

Bell says that even though vacancy rates remain low and prices have grown over the past year, landlords may not be as willing to impose rental increases on tenants at a time of low consumer sentiment.

“It’s possible that landlords have recognised that renters may not have been as willing to agree to rental increases in the June quarter as consumer spending remained weak and worries over the world’s major economies spilled over into the local share market which fell nearly 10% as a result.”

Bell points out that the slew of home buying in 2009 is still having an effect on asking rents in most capital cities. However, strong economic data and employment should help increase rents over the second half of the year.

“However, the alternative option for renters of moving into ownership has become less attractive as property prices have risen significantly in most cities in the last year and interest rates have risen a long way off their lows, with increases on the way.”

“As leases expire and are renewed however, it is expected that a robust employment market, rising
incomes and low vacancy rates in most capitals will start seeing asking rents increasing again, as we’re already seeing in Sydney, the country’s largest rental market.”