Apartment rents sink deeper into abyss

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CoreLogic’s August update reports heavy falls in apartment rents, driven by Sydney and Melbourne:

Nationally, capital city rents have held up better than housing values. Since the end of March, capital city dwelling rents are down 1.4% compared with the 2.3% drop in dwelling values. Despite the apparent resilience, a more substantial performance gap is opening up between houses and units across the rental sector. Since the end of March, capital city house rents are down by a modest 0.3%, while unit rents have fallen a more substantial 3.5% with rents underperforming relative to house rents across every capital city.

The difference is most significant in Melbourne and Sydney where there is approximately a 3 percentage point variance between the fall in house rents compared to unit rents. Hobart has also recorded a significant drop in unit rents through the COVID period, falling 5.1%.

According to Mr Lawless, weaker rental conditions across the unit sector can be attributed to a combination of high supply and low demand.

“Supply levels for rental grade units have surged over recent years, especially in Sydney and Melbourne, where high-rise unit supply across key inner city markets has remained substantially above average. At the end of March there remained around 51,000 units under construction across NSW (+19% on the ten year average), and about 45,000 units were under construction across Victoria (+24% above the decade average).”

“On the demand side, rental demand for inner city apartments has been significantly impacted by stalled overseas migration, including foreign students, as well as less demand from domestic students who are generally studying from home. Rental demand has also been impacted by weak labour market conditions across industry sectors common with renters, including the food, accommodation, arts and recreational services sectors.”

CoreLogic rental listings data shows advertised rental supply in select inner city areas has more than doubled between mid-March and early August. With high supply and weak rental conditions likely to persist, at least until international borders re-open, inner city investment unit values are likely to remain under significant downside risk.

Property investors in Sydney and Melbourne are in a precarious position.

With immigration collapsing, rental vacancies across both cities has ballooned:

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Meanwhile, the apartment supply pipeline remains above the decade average across both cities:

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Accordingly, apartments rents should continue to fall, which comes at the same time as dwelling values are falling.

Wedged between falling prices and rents, there is the clear and present danger that financially stressed property investors could cut their losses and sell in significant enough numbers to drive property prices even lower.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.