The March quarter consumer price index (CPI) data, released today by the Australian Bureau of Statistics (ABS), revealed continued weak rental growth at the national capital city level.
According to the ABS, rents nationally grew by 0.4% over the March quarter of 2014 – the lowest quarterly growth since March 2005 – and was up by only 2.1% over the year, with a clear downwards trend evident (see below charts).
What is most interesting about the current moderate rental growth is that it is at odds with other housing-related indicators, such as population growth and prices, which continue to register strong growth, although the former is obviously slowing.
For several years, Australia’s population has grown strongly, which other things equal suggests that rents should rise. Yet rental growth recently decoupled from population growth, and both are now falling in unison (see next chart).
The divergence between house prices and rents also continues widen, signalling increasing over-valuation (see next chart).
One logical explanation for the weak rental growth is that wages are growing at the slowest pace on record (see next chart), and while home buyers can leverage to buy a home, they cannot leverage rents.
Another explanation is that dwelling construction is now more than offsetting rising population growth, placing downward pressure on rents (see next chart).
Clearly, the economy’s weak fundamentals, along with strong dwelling construction, are weighing on the rental market, and it can only be a matter of time before they weigh on house values as well.