Where are we renting?

Across the country’s capital cities, rents for the combined house and units markets increased by 2.9% over the year. In comparison, house rents have increased by a total of 40.0% over the last five years and unit rents increased by 45.8%. Across the capital cities, house rents have increased by as much as 6.7% (Adelaide) over the last year and have been flat in Sydney, Melbourne and Perth.

The rental market has been recording lower levels of growth largely due to the fact that first home buyer demand was so strong during 2009. This trend can mostly be attributed to the lowest interest rates in almost 50 years and the First Home Owner’s Grant Boost which dramatically improved affordability. As a result, a record number of first time buyers (who were mostly previously renters) were active during 2009 which in-turn eased upwards pressure on rental rates.

Despite the sluggish rental growth performance nationally over the last year, certain areas have outperformed and others have well and truly underperformed. The results detailed are for well established rental markets only, as such, results have been published for those suburbs which have had at least 30 rental advertisements both this year and the previous year (median rents can be quite volatile in markets where volumes are low or there is a lot of new rental stock being introduced).

The results of the 40 strongest performing suburbs are quite varied however, Sydney well and truly dominates the list with 28 of the 40 best performing suburbs. The suburbs detailed mostly fall into two broad categories: premium markets with prices in excess of the capital city median price or outer more affordable suburbs which are located close to working nodes which results in strong rental demand.

Across the capital cities, Vaucluse recorded the largest increases in rental rates (+35.4% across 64 listings) over the year to June. Vaucluse is one of Sydney’s most desirable residential suburbs and with median rents of $1,625/week the rental market receives its demand from premium and executive rentals.

Over the 12 months to June 2010, the Perth suburb of Applecross has recorded the greatest fall in median weekly advertised rent of -38.3% across 54 listings. Applecross is one of Perth’s most prestigious suburbs, located adjacent to the Swan River and has seen rents fall from $810/week to $500/week with a greater number of rental houses advertised over the last 12 months than during the previous 12 months.

Of the capital city suburbs which have recorded the greatest fall in median weekly rents over the last year, 20 of the 40 suburbs detailed have a current median house price in excess of $1 million. The remaining 20 suburbs are characterised as mostly having median prices in excess of the capital city median price.

The results are a little surprising with the list of best and worst performers each seeing a significant number of premium markets within. The results may suggest that those looking for premium rentals are becoming more discerning, willing to pay more to be in a location which they perceive as being more desirable. Rental yields in most of these premium markets remain very low, however suggesting that most investors are motivated by the prospect of capital gains and tax deductions rather than rental income.

Overall the national market has been witnessing fairly limited growth in rental rates during the last 12 months at a time when property values have been ramping up. With property value growth now slowing and fewer active buyers, we are anticipating that rents are likely to start to increase across the capital city markets. The reason for this being that with fewer active buyers, clearly more people are choosing to rent. Coupled with this, the construction of new dwellings remains at low levels resulting in a lower level of additional rental accommodation becoming available. As a result, there is likely to be increased competition for the available rental properties. The net result of flat property values and increasing rental rates will be improved rental yields over the coming year – great news for investors but no so great for renters.

Over the 4 weeks to August 29, RP Data has been tracking a total of approximately 84,600 rental listings nationally with rental advertisements trending lower over the last month and a half. With rental vacancy rates remaining tight and supply of new rental stock limited thanks to the insufficient supply of new stock, we anticipated that over the coming months vacancy rates will tighten further and upwards pressure on rental rates will return.

It’s also important to consider that although both sides of politics have said they will cut immigration, the proposed levels are still above the long-term average level and few new migrants buy homes straight away. This also results in additional competition for available rental stock.

Tim Lawless is the Director of Property Research at RP Data.