More rent hawkishness

RP Data a few days back released its June Quarter Rental Review. The report provides a detailed summary of the nation’s rental markets, both at the capital city and regional levels.

Consistent with the June Quarter APM Rental Report, released last week, RP Data confirms that rental growth has stalled after a solid run-up between 2006 and 2008:

Median weekly advertised rents across the capital cities have recorded no change over the second quarter of 2011, while rents across the whole of Australia have increased by 2.9% over the same period. Based on median weekly advertised rents, capital city house rents currently sit at $385/week and unit rents at $380/week. Across the county, house rents are $360/week and unit rents are at $355/week.

During the past 12 months, rental growth has tracked below average; a trend that has been evident since early 2008 as rental demand started to slow. The combined capital cities have seen rents increase by 2.7% over the year which is below the inflationary figures to March 2011. Nationally, rental growth has actually been slightly higher over the year, with rents increasing by 2.9% which is likely a result of the most recent quarterly results…

Since the start of 2009, capital city house rents have increased by just 4.1%, while units have performed relatively stronger with rents increasing by 8.6% over this same period. Across the nation, house rents have increased by just 4.3% since the beginning of 2009, while unit rents are up by 7.6%. In all cases rental growth has been well below the benchmark performance of the last five years since the beginning of 2009.

RP Data also provides the following summary of capital city rental rates. Click on the report to see a more detailed break-down of rents by dwelling type:

RP Data attributes the recent weakness of the rental market to…“a number of factors, including stimulus from low interest rates and the First Home Owner’s Grant Boost, [which] enticed prospective new home owners into buying and eased demand for rentals.”

RP Data also anticipates stronger rental growth in the future, with growth to revert to around 5-year average levels (see above table).

RP Data is anticipating stronger levels of rental growth in the short-term. Sales volumes are depressed and first home buyers are inactive, as a result there is likely to be increased competition for rental stock…

For capital cities we anticipate that the improving rental conditions will persist during the remainder of 2011 with the annual rate of growth likely to be superior to that of recent years and in excess of inflation which was running at 3.3% over the March 2011 quarter. Capital city vacancy rates remain tight, first home buyers remain relatively inactive, interest rates are stable but may rise and new housing supply has eased markedly in recent months. Limited new development during 2011 is likely to add to the upwards pressure on capital city rental rates and as a result we expect rental growth to revert to around five year average levels with inner city units and outer more affordable housing stock having the strongest prospects for rental growth.

While I don’t have any particular view on the future direction of rents – except that Melbourne’s are likely to remain relatively flat due to its current construction boom and slowing population growth – I do find some of RP Data’s reasoning a little odd.

First, in explaining the recent sluggish growth of rents, RP Data blames “stimulus from low interest rates and the First Home Owner’s Grant Boost, [which] enticed prospective new home owners into buying and eased demand for rentals”. How does an increase in buying from first home buyers (FHBs) necessarily reduce demand for rentals?

All FHBs either leave their parents house or exit rental accommodation when they purchase their first home.

In the case of a FHB that moves out of their parents home, the impact on the rental market is likely to be detrimental if they: (1) purchase from an owner-occupier, which forces them onto the rental market (thereby increasing rental demand) or into another owner-occupied dwelling (which if pre-existing, will displace the former occupants, again possibly increasing rental demand); or (2) purchase from an investor, thus displacing the former tenants and forcing them back into the rental market (again increasing rental demand). Only if this FHB purchases a newly constructed dwelling, would it have no discernible impact on the rental market.

In the case of a FHB that moves out of rental accommodation, the potential impact on the rental market is more likely to be benign. If they purchase a pre-existing dwelling, they will reduce rental demand by one unit (the rental accommodation they have left), but will likely also increase rental demand by one unit (since they have now displaced the former occupants, who now must either enter the rental market or purchase another home, which if pre-existing will also displace those former occupants). However, if the FHB (or the occupants they displace) instead buys a newly constructed dwelling, then rental demand will be reduced by one unit relative to supply, thereby easing the rental market.

The bottom line is that the level of purchases by FHBs is not the relevant metric when examining the rental market. Rather, it is the level of new home construction relative to population growth and occupancy rates that will determine the level of rental demand relative to supply.

In a similar vein, one of RP Data’s arguments for solid rental growth going forward – “sales volumes are depressed and first home buyers are inactive” – is similarly questionable. Sales volumes should have minimal impact on rents, since the majority of homes on the market – whether owner-occupier or investor – are occupied/tenanted at the point of sale. Rental supply will only be effected where homes have been vacated prior to being placed on the market (e.g. a landlord evicts his tenants prior to listing).

Similarly, FHB inactivity will have no discernible impact on the rental market if FHBs remain living in the family home or they continue renting for longer. Again, the key metric is the rate of new home construction, not FHB activity per se.

Despite these objections, it was otherwise a useful report by RP Data, chock full of juicy facts and figures.

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Unconventional Economist
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  1. But RPData only sees advertised rents, and does not see renewals. How accurate is this data? My rent has only gone up $50 in 8 years….

  2. How about looking on to see thousands of discounted rental properties sitting empty Australia wide for months on end sending leveraged investors to bankruptcy courts. Funny you never hear about them from RPdata of BS Crapnell!

    • At my work people are putting up their own ads to rent out properties…so they must be having trouble renting if they are resorting to this tactic.

      The way the rental market is reported in MSM you would think people are queing up for places to rent…they aint.

      People are moving back home with parents, moving into bigger share houses, moving in with their partners.

      I know about 10 couples in the last 12 motnhs that have moved out of their seperate share houses and in together – sometimes this is just into another share house.

      Cohabitation occurs in every economic downturn and will/has occured here.

      Rental vacancy rates are just fine outside of Sydney!

      • Sorry for clarity, the ads they are putting up a printed flyers that they made themselves…strange tactic in the age of the internet…but maybe the net isnt enough in this environment

  3. Follow the RP Data logic:
    – All rentals markets are currently tight
    – Tight rental markets mean rapid increases in rents
    – Rents aren’t increasing much if at all
    – But tight rental markets mean increases in rents!!!
    – Therefore tight rental markest *will” mean increases in rents (as soon as the rental markets start behaving as they should)
    – But we have to give reasons why the tight rental markets aren’t behaving, we can’t have falling prices AND no rent rises!!!
    – Um, supply is tight, so maybe demand’s taken a brief respite due to, say, lower interest rates?
    – Only only a brief respite though, as in “rents thru the roof any minute” brief?
    – The law of expential trend growth commands it thus

    Noone mention the rent ceiling though, OK? Or the boost to rental supply to come from unsold sales stock if this Spring’s sales volumes don’t explode…

  4. In my area (Upper North Shore, Sydney) I think rents have dropped in the last year. I can see a property on the market that I was close to renting last year for $75 less per week than they were asking. And it has been on for over a month so seems to be overpriced.

    My circumstances have changed and I need to reduce my rental costs by 15%. So I’m going to ask my landlord for a $150/week reduction.

    I’ll let you know how I go.