Is affordability starting to stifle rental price growth?

Residential rents across Australia rose just 0.6% in September, the smallest monthly increase this year, as affordability woes kept renters away, according to new data from CoreLogic.

The rate of rental growth slowed across the capital cities last month despite a severe shortage of available rental housing. In Canberra, rents dropped 0.1%, The Australian Financial Review reported.

The slowdown in rental growth was also reflected in the September quarter data, which showed national rents rising by just 2.3% – 0.7 percentage points slower than the previous quarter.

At their May peak, rents rose by 1% month over month and 3% over the quarter, AFR reported.

The slowdown in rental growth came despite the national vacancy rate hitting a record low of 1.1% in the September quarter. Rental listings in the combined capital cities also hit record lows, and are 35% below the previous five-year average, according to CoreLogic.

CoreLogic research analyst Kaytlin Ezzy said that rental growth was feeling the impacts of worsening affordability and the rising cost-of-living.

“The easing in rental growth is a little surprising, given record-low vacancy rates,” she told AFR. “Potentially we are seeing rental affordability pressures forcing a reversal in the earlier trend towards smaller households and lower density preferences. While we are yet to see any evidence that rental households are getting larger, it makes sense that renters would be re-forming bigger households in an effort to spread high rental costs across more tenants.”

The regions have also dropped behind the capital cities, with rents rising 1.3% over the September quarter – 1.4 percentage points lower than the capital cities’ quarterly rise, AFR reported. Some of the most popular regional markets saw steep declines over the quarter, while inner-city areas continued to rise.

SQM Research managing director Louis Christopher told AFR that demand for regional rental homes had tumbled in the past few months.

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“We’re no longer seeing the influx of people from the cities moving into the regions, which has slowed new demand right down, compared to the rate of growth that we’ve seen during COVID,” Christopher said. “On top of that, there has been a trickle back of people from the regions back into the cities now that COVID is over. There is no longer any concern of lockdowns and employers are asking workers to come back into the office. The return of overseas migrants, who typically choose to rent in high-density markets of Sydney and Melbourne upon arrival, also helped fuel the sharp rise in rents in the biggest capitals.”

Ezzy said that despite the slowdown, rents were likely to keep rising – especially in the high-density sector as renters look for more affordable housing.

“With rental affordability challenges becoming worse by the month, it’s likely the medium- to high-density sector will become increasingly popular with renters,” she told AFR. “Anecdotally, we are also seeing more Australians willing to live in a higher-density situation now that COVID lockdowns are hopefully well behind us and most of the population is vaccinated.”

Ezzy said it was “hard to see rents trending lower” until there was “firm evidence of a supply response.”

“Although demand may have eased in line with a rebound in the average rental household’s size, the pickup in overseas migration would be at least partially offsetting demand for rental housing,” she said.