Australia’s two-speed rental market

SQM Research has released its rental report for March, which reveals an extremely tight rental market outside of Sydney and Melbourne, which are suffering from high apartment vacancies from the collapse of international student arrivals.

As shown in the next table, the national rental vacancy rate rose 0.1% in March to also be 0.1% higher than a year ago. However, this increase in vacancies has been driven by Melbourne (+2.5% YoY) and Sydney (+0.5% YoY), whereas the other capitals have all recorded falling vacancy rates over the year.

Rental vacancy rates

Rental vacancies are tight everywhere but Sydney and Melbourne.

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According to SQM, the rise in rental vacancies in March was unusual and has not occurred since 2007. The monthly increase “was driven by increases in vacancies in Sydney as well as a reversal in some of the tight rental markets of regional Australia”.

The divergence in vacancy rates between Melbourne and Sydney and elsewhere has also led to divergent rental growth:

Over the month to 12th April 2021, capital city rents rose 1.3% for houses to $557 per week but fell 0.2% for units to $411. Reflecting rental accommodation oversupply, Melbourne and Sydney unit rents fell by 1.4% and 0.4%, respectively. Over the year, Melbourne and Sydney unit rents are down substantially by 12.0% and 6.5%. Melbourne house rents fell by 0.5% over the month and by 6.1% over the year to 12th April. In Sydney, house rents rose by 0.9% from a year ago…

The Melbourne CBD vacancy rate now stands at 8.3%, while the Sydney CBD vacancy rate was 6.2% in March 2021…

Elsewhere, house rents rose in Adelaide, Perth and Brisbane by more than 2.0% over the month to 12th April, while unit rents also rose. Over the year, rents have shown strong growth in the smaller cities, by as high as 25.5% for houses and 11.1% for units in Darwin. Nationally, house rents rose by 14.7% while unit rents rose 6.5%, pushed up by strong growth in regional locations around Australia.

The divergence in rental markets across Australia’s East Coast capitals is especially interesting. As shown in the next chart, Melbourne’s and Sydney’s rental vacancy rates ballooned while Brisbane’s crashed:

East coast rental vacancies

Brisbane’s rental vacancies collapsed as Melbourne’s and Sydney’s ballooned.

This divergence in vacancy rates is translated into rental growth. Melbourne is experiencing by far the highest vacancies and annual rents have fallen sharply across both units and to a lesser extent houses:

Melbourne rents

Melbourne apartment rents have crashed, whereas house rents have fallen less sharply.

Sydney’s rental vacancy rate is less elevated and this is translated into smaller annual rental falls across the unit market and minor falls across houses:

Sydney rents

Sydney unit rents have fallen sharply, whereas house rents have experienced minor falls.

Finally, the tight rental vacancies across Brisbane has driven strong rental growth across houses and solid rental growth across units:

Brisbane rents

Brisbane’s tight rental market is delivering strong rental growth.

The below table showing internal migration across the capital cities helps explain why Brisbane’s rental market is so much stronger than Melbourne’s and Sydney’s. Brisbane has experienced solid internal population growth while Melbourne and Melbourne suffered a loss of residents:

Australia internal migration

Sydney and Melbourne suffered a sharp decline in residents in Q2 and Q3 2020.

Melbourne’s and Sydney’s rental markets will likely remain soft until net overseas migration is rebooted.

Unconventional Economist

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