Where are rents rising and falling?

Recent evidence suggests that rents are starting to increase as capital gains fade and slip into negative.

The latest results from the RP Data – Rismark Home Value Indices show that over the 12 months to March 2011 capital city rental rates have increased by 2.9% which is well below average. However, over the last quarter, capital city rents have increased by a much larger 4.8%. The view that rents are starting to increase is supported by the most recent CPI data from the ABS which suggests that rents have increased by 1.3% during the first quarter of 2011.

According to our data, rents for houses (up 3.3%) have increased by more than rents for units (up 2.0%) during the year. In contrast, capital gains for units (up 1.4%) have outpaced those of houses (down 1.2%) over the same period.

As always, there are winners and losers with some areas experiencing rental growth well in excess of the national benchmark while others dramatically underperform.

Across the various capital cities, rental growth over the year has been strongest in: Sydney (5.3%), Hobart (4.5%), Perth (4.4%) and Adelaide (2.8%). The laggards for rental growth have been: Darwin (-3.7%), Brisbane (-1.0%), Melbourne (0.9%) and Canberra (2.5%). Across all cities, rental growth over the last year has been well below the five year average annual rate for capital cities of 7.0%.

The capital city region that has recorded the greatest increase in advertised rental rates over the 12 months to March 2011 was Woollahra in Sydney’s Eastern Suburbs. Houses within the popular inner city region have recorded an increase in advertised rents of 22.2% over the year. Sydney regions dominate the list accounting for 23 of the 35 best performing capital city rental regions over the last year. Houses have also dominated the list accounting for 22 of the 35 best performers.

In contrast, the Perth council area, which is essentially the inner city region of Perth, has recorded the greatest fall in median advertised rents over the last year. Median house rents have fallen from $650/week to $510/week, a fall of -21.5% over the year. Perth regions have dominated the list of weakest performers, accounting for 20 of the 35 weakest performing capital city markets for rents. Across the weakest performing regions, units (19) have underperformed houses (16).

With tight rental vacancies and ongoing demand for rental accommodation, we expect that weekly rents will increase in most capital cities.

Although there was a surge in building approvals last year, in many instances this new supply won’t actually get to the market during 2011. Also, with banks’ lending criteria tight requiring significant pre-commitment of sales within new developments we are seeing fewer new high density developments taking place in inner city areas. These regions in particular are particularly attractive for renters as they provide significant levels of amenity. With less new supply in most capital cities it is likely to create greater competition for available stock and result in rental increases.

Given these conditions, we anticipate that rental growth should be quite strong during 2011. Over the last two years, capital city rents have increased by a total of just 3.2% which is well below the average annual rental growth level of 7.0% during the last five years.

It is anticipated that rental growth this year will be more in line with five year average levels than with recent growth levels, recorded at a time when property values were typically increasing.

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