Where’s the rental growth?

Last week we took a look at the best and worst suburbs in terms of rental growth for houses over the last year, this week we take a look at the best and worst performers for units.

Across the country’s capital cities, rents for the combined house and unit 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 a greater 45.8%. Across the capital cities, unit rents have increased by as much as 7.9% (Canberra) over the last year and at the other end of the spectrum, weekly rents have been flat in Sydney 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 fact that units tend to enjoy superior rental returns than houses suggests that owners of investment properties in certain areas have also enjoyed the benefit of rental growth and rental return improvement.

The results of the 40 strongest performing suburbs are dominated by Melbourne and Sydney suburbs, both have 16 suburbs detailed amongst the best performers. The list of best performers shows a clear trend towards the more affordable unit markets that are often located in the middle and outer ring suburbs. Units in these suburbs generally benefit from being more affordable than houses and are typically located strategically, closer to desirable amenities and transport options.

Across the capital cities, the inner city suburb of West End in Brisbane recorded the largest increases in rental rates (+26.3% across 303 listings) over the year to June. West End offers a wide variety of units from older style affordable walk-up units right up to premium waterfront offerings in a location with substantial local amenity and just minutes from the Brisbane CBD.

Over the 12 months to June 2010, Waverton which is situated in inner city Sydney has recorded the greatest fall in median weekly advertised rent of -13.6% across 81 listings. Waverton is a premium inner city unit market thanks to its location adjacent to Sydney Harbour, opposite the city. Over the year median rents have fallen from $550/week to $475/week.

Of the capital city suburbs which have recorded the greatest fall in median weekly rents over the last year, the vast majority are situated within established areas quite close to the city centre.

The results indicate that rental demand has remained quite strong within the outer suburbs of the capital cities for units and selected inner city locations. However, generally demand has weakened for inner city units and this is likely the result of an extremely active first home buyers market during mid to late 2009. As a result, in the well established inner city unit markets the renter has had a greater variety of choice, especially considering the significant supply within these markets and in a number of instances rental rates have actually fallen.

Like we stated last week, 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. Over the last 12 months property value growth has actually been superior for the more affordable unit product (11.0% vs 9.2%) however, the rate of value growth for both houses and units is now slowing.

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. In particular we are expecting increasing rental pressure within quality inner city unit markets located in superior locations close to transport and retail amenity. Also, construction of new unit developments has improved over the last year but remains at low levels and many new inner city unit developments have either been withdrawn or delayed. As a result of minimal supply introductions, 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.

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 adding to the upwards pressure on rental rates.

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