There are several cross currents running through the Australian rental market at present. My inbox is filling up with ‘please explain’ rental focused emails.
Some are confused as to why vacancy rates are falling in many places, yet population growth has dropped, sometimes markedly.
Others don’t see how rents can be rising when unemployment and under-employment remains high.
Many investors appear worried about getting their back rent paid post the rental moratorium. Ditto when it comes to the level of future weekly rents once JobKeeper is wound up. Both supports are set to expire in late March this year.
It also doesn’t help when the same national newspaper – and in the same weekend edition – holds two conflicting rental market articles, one spruiking that large rental increases lie ahead, whilst (for mine) the more trusted commentator suggesting the big challenge facing residential property investors in getting a half decent rental return.
So, this post I will try and unpack some of this rental stuff.
A table and two charts follow.
Table 1 shows that there has been a marked decline in new rental digs across Queensland. This is more noticeable in regional Queensland than the more urban south east corner of the state. Many other areas across Australia face similar circumstances.
Whereas there has been some shift in population movements over the last 12 months – revisit last week’s post here – the demand for new rental housing remains high across many parts of Australia and in particular in Queensland.
Our work suggests that Queensland needs an annual rental build rate in the order of 4% per annum. This rental addition rate is closer to 5% for SEQld and near 3% in regional Queensland locales.
Table 1 shows that the recent rental builds rates are way below these benchmarks.
As a result, rental vacancy rates have been falling for some time.
Chart 1 shows that asking rents are rising across metropolitan Brisbane. At first glance it would appear that the falling vacancy rate is the main reason why. Yet past trends suggest that there must be other factors in play.
We have found that vacancy rate movements in concert with changes in average weekly earnings helps largely explain weekly rental movements across Australia.
Chart 2 shows the close relationship between the annual change in weekly rent and wage growth.
So, rents rise when the vacancy rate is tight (and falling) and when weekly wages are growing.
One interesting finding is that private sector wages are rising rapidly at present.
Chart 2 shows this trend for Queensland, but a review of the ABS data, shows that this is taking place across the country.
Another surprise is that public sector wage growth is lacklustre at present (lifting by just 1.9%) against the private sector’s most recent 6.3% annual lift.
JobKeeper must be the main influence on the strong private sector income lift.
And if so, this helps explain why that there has been little real complaint about the frequent snap state-based lockdowns; why confidence remains comparatively high and why current household consumption doesn’t match the level of high underemployment.
It will be interesting to see if this complacency lasts past March.
To me there are too many unknowns to forecast – with any real confidence – what is likely to take place in the rental space over the next couple of years.
Except to say that the removal of JobKeeper is likely to see wage growth fall back to it lacklustre longer term trend. This will impact on how much tenants can pay in rent.
There is little doubt that HomeBuilder has brought forward new housing supply. This is particularly the case when it comes to suburban detached housing. What is unknown, at present, is how much of this new supply is being built for tenants. I do suspect it is less than 30%. So, it’s impact on new rental supply is likely to be limited.
When it comes to the demand side of things, when will overseas migrants return to our population mix and at what volumes?
Another unknown is how many renters, who took advantage of the rental moratorium, will pay back what they owe. And if they don’t (or can’t) will landlords give them the boot? If kicked out, where will these folks then live?
There is little doubt that the recent slowdown in rental supply, as shown in table 1, is allowing some landlords to lift rents. This will continue until local rental supply increases and/or wage growth subsides.
But for the life of me – given the overall state of the ‘real’ economy and especially how it is affecting those without financial assets (i.e., many, if not most, renters) – I cannot see rapid lifts in weekly rents.
So, if was going to have a stab at it – with my hand on my heart – I would say that landlords face a safer future if they hold dwellings that can hold multiple tenants.
Tenants, for mine, will be forced to share. They will gravitate to those digs that best accommodate this type of occupancy.
This has been my thesis for some time and a deep dive into the rental data when preparing this post hasn’t changed my mind. In fact, it has reinforced it.
Upon reflection, I must admit my end note is said with some confidence.