CoreLogic’s April housing market update shows that Australia’s rental market remains two-speed, with the smaller capital city markets recording strong rental growth, while Sydney and Melbourne flounder.
As shown in the next chart, Darwin and Perth’s rental markets are booming, catching up on years of falls leading up to COVID. Across both houses and apartments rents have risen at a record annual pace of between 13% and 20%.
Rental growth remains two-speed, generally strong outside of Melbourne and Sydney.
House rents have also risen strongly across Canberra (7.2%), Brisbane (6.4%), Adelaide (6.3%) and Hobart (6.3%), whereas unit rents across these markets are softer.
The biggest outliers continue to Melbourne and Sydney. Unit rents fell sharply across these two markets in the year to April; although the rate of falls has eased. These markets have also experienced softer house rental growth than their smaller capital city counterparts.
The reason is obvious: Melbourne and Sydney are the key landing points for overseas migrants (including international students. And with Australia’s international border mostly shut, Melbourne’s and Sydney’s rental markets are being hit hardest, especially inner-city high-rise apartments. As noted by CoreLogic’s head of research, Tim Lawless:
The weaker rental conditions in Melbourne and Sydney can be attributed to the larger exposure to tenancy demand shocks from stalled overseas migration. “Prior to COVID, Melbourne and Sydney accounted for around three quarters of overseas migrants into the capital cities. With international borders remaining closed, rental demand in these cities, and in particular their unit market, has been materially impacted.”
Rental conditions have been stronger outside of Melbourne and Sydney where demand is less dependent on overseas migration and interstate migration trends have provided an additional lift. Rental supply has also been less substantial outside of Sydney and Melbourne due to historically lower levels of investment activity and less construction aimed at the investor segment of the market.
Weaker rental conditions are skewed towards higher density markets, especially in Melbourne and Sydney. The downwards shift in unit rents has been more severe in Melbourne where rents are down -7.6% over the past 12 months. However, rental rates in Melbourne’s apartment sector look to be stabilising, with CoreLogic’s measure of rents holding steady over three of the past four months. The monthly trend in Sydney apartment rents has recently turned positive, with unit rents consistently rising over the past four months to be 2.8% higher over the year to date.
The sluggish/falling rents across Sydney and Melbourne, combined with rapid price growth, also continues to compress rental yields, which have fallen to another record low:
Nationally, the gross rental yield has fallen from 3.72% a year ago to a new record low of 3.50%. The trend towards lower yields is most evident in Sydney, where the gross yield is averaging just 2.69% (down from 2.92% a year ago) and Melbourne where gross yields are averaging 2.87% (down from 3.18% a year ago). Such low yields across Australia’s largest cities imply an imbalance between housing values and housing rents.
The only capital cities where rental yields are higher than a year ago are Darwin (where yields rose from 5.81% to 6.10%) and Perth (where yields rose from 4.28% to 4.40%).
Rental yields hit another record low, driven by Sydney and Melbourne.
The above chart illustrates why I am less bullish Melbourne and Sydney dwelling values over the medium to long-term. They are far more over-valued and less affordable than the other capital city markets where neutral or positive gearing opportunities are still possible.
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