ANNUAL GROWTH IN HOUSE RENTS EASES IN SOME CITIES
Rental trends have diversified, with the highest rental appreciation now occurring within the unit sector of the three largest capitals, led by a 16.7% jump in Sydney unit rents over the past year, according to CoreLogic.
Although unit rents in the largest cities showed a period of weakness through the early phase of the pandemic, weekly rental values for units are now 19.0% higher than at the onset of COVID in Sydney, 10.4% higher across Melbourne and 23.6% up in Brisbane.
Several factors are likely to be contributing to the surge in unit rents. Rental affordability pressures may be forcing a transition of demand towards higher density rental options (where costs tend to be lower). Additionally, the strong rebound in foreign student and international migrant arrivals are adding to rental demand, particularly in inner city precincts as well as areas within close proximity to universities and transport hubs.
Annual growth in house rents (as opposed to unit rents) has eased in some cities, which is potentially a reflection of renters reaching a ceiling on what they are able or willing to pay, rather than a rebalancing of rental supply and demand across the low-density sector. At the combined capital city level, annual growth in house rents has stabilised at 9.5% over the past four months, but the quarterly trend indicates a further slowdown in the pace of rental growth for houses.
With vacancy rates remaining around record lows, it is likely rents will continue to rise at least through the rest of the year.
“We aren’t seeing much in the way of a rental supply response. The latest data on private sector investment activity is still trending lower, and new unit commencements continue to fall after holding below the decade average since late 2018. Additional federal funding for social and community housing isn’t in the budget until 2024, and even then, that will take some time to deliver,” says Tim Lawless, CoreLogic’s research director.
“Against this scenario of limited new rental supply, demand looks set to rise further based on the influx of overseas arrivals, amplified by an additional 35,000 permanent migrants relative to prior years.”
Gross yields continue to trend higher as rents consistently outpace housing values. Across the combined capitals, gross dwelling yields bottomed out at 2.96% in late 2021/early 2022. Since that time, gross yields have risen by 69 basis points to 3.65%, the highest level since October 2019. However, net yields, which take into account mortgage costs, are likely to have trended lower, especially for highly leveraged investors.
Sharp reduction in the rate of property value declines
CoreLogic’s February Home Value Index showed a deceleration in the rate of property price falls last month, with the national index falling by just -0.14%, the smallest monthly decrease since May 2022.
The increase in Sydney dwelling values by 0.3% was the primary factor behind this trend. Darwin was the only city to record a steeper monthly fall in February, with every other city except Hobart seeing housing values fall by less than half a per cent.
Tim Lawless, CoreLogic’s research director, attributed the stabilisation in housing values to consistently low advertised supply levels and a rise in auction clearance rates. However, he also cautioned that the improving trend might be short-lived due to higher interest rates and lower sentiment.
HAWKISH SHIFT IN RBA MESSAGING
The Reserve Bank of Australia’s February Board minutes revealed a 50-basis point rate hike had been considered.
This was due to the perceived risk of persistently high inflation, along with wages and price data exceeding the RBA’s expectations (notably however, the recent wage price index data released at the end of February came in lower than market expectations).
Three of the Big Four banks are now expecting the cash rate to peak at 4.1% between May and June. At this level, the average variable mortgage rate for a new owner-occupier loan would be in the vicinity of 6.0% and, based on a three-percentage point serviceability buffer, prospective borrowers would be assessed to service their loan repayments at a mortgage rate of around 9%. APRA recently released a statement reinforcing that a three-percentage point serviceability buffer remained prudent in the currently uncertain economic environment.
With more rate hikes expected over the course of the year, a further decline in borrowing capacity is on the cards, which could re-accelerate housing market declines. The news of more rate rises saw measures of consumer sentiment fall further. With consumer spirits around recessionary lows, high commitment decisions, such as buying or selling, are likely to be delayed.
PROPERTY MARKET OUTLOOK
Looking forward, despite the recent trend towards stabilisation, housing risks remain skewed to the downside.
February housing market performance suggested some renewed strength in market conditions. The flow of new listings has been tracking at below average levels since September last year, which has helped to support a reduction in the pace of value falls. But, it’s probably too early to call a trough in the cycle considering there are several factors which could trigger a ‘re-acceleration’ of housing value declines over the course of the year.
Serviceability of existing home loans may be challenged this year.
Low advertised stock levels are likely to persist as home owners resist selling in a declining market. However, there may be a small portion of prospective vendors who become more motivated or are forced to sell amid growing challenges to serviceability. These challenges include an ongoing increase in interest rates, more borrowers being exposed to higher rates as the majority of fixed terms end, rising unemployment and a higher cost of living.
Arguably some pent-up supply has accrued while sellers remain on the sidelines. If the flow of new listings increases in the absence of a rise in buyer demand, we could see additional downwards pressure exerted on housing values.
Although mortgage arrears rates were moving through record lows last year, the portion of borrowers running behind in their repayments is likely to trend higher through 2023.
Longer term, the market is poised for recovery
Despite the headwinds accumulating for the housing market in 2023, there is no denying the fundamental under-supply of housing stock. This undersupply is most acute in Australia’s rental market, with the strong return of overseas arrivals adding to aggregate housing demand. At the other end of the equation, approvals data suggests that supply is being constrained by higher
interest rates and building costs. With the cash rate expected to stabilise later in 2023, there could be a pick-up in buyer demand through the second half of the year, or early in 2024.
Weekly listing volumes see a seasonal rise
Despite more properties now coming onto the market for sale, volumes remain low relative to previous years. In the four weeks ending 26 February, there was a notable rise in the number of new listings advertised. Nationally, the volume of new listings rose by roughly 11,250 more than the previous four-week reporting period (the four weeks to 29 January). This is a slightly bigger jump in new listings than what would usually be observed at this time of the year. However, this sharper than normal seasonal rise only brought the number of new listings to 38,118 in the reporting period, which is -12.6% below the previous five-year average for this time of year.
The total volume of listings counted in the four weeks to 26 February nationally was approximately 143,500, -26.3% lower than the previous five-year average for this time of year.
So far, it seems prospective vendors are prepared to wait this downturn out. The flow of new listings is well below average for this time of the year across each of the major capitals. The flow of new listings will be a key trend to watch over the coming months. Any signs of listings activity moving to above average levels could weigh on housing prices.
Against relatively low advertised stock levels, the estimated volume of sales recorded a strong seasonal bounce back in February. The monthly lift in sales nationally was 39.4%, which is comparable to February 2021 and 2020, albeit from a lower base compared with when market conditions were stronger. While the monthly volume of sales is subject to revision, this lift in sales corroborates other data such as clearance rates and the Housing Value Index in suggesting the uplift in purchasing demand may have been stronger than supply through the month.