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Rental growth - How far and how long

Rental growth – How far & how long?

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Renters and owners are both desperate to know how far rental growth will go and for how long.

This week’s findings from Australian Bureau of Statistics (ABS) were not good news for renters. It all points to rents continuing to rise for some time.

We know the rental market is at fever pitch, but this week’s ABS data gives us a window into what will happen to rent for the next few years. It found the number of dwelling approvals nationally fell 1% in January against an expected 4% rise. This follows a fall of dwelling approvals in December of 10.1%.

In Victoria the numbers are more extreme. Private sector housing approvals fell by 16.7% and apartments by 9.7% in January. (seasonally adjusted).

Monthly numbers bounce around and can be misleading, but the general trend is the same. Over the last 2 years dwelling approvals have fallen by around 20% nationally.

The reason this gives us a window into what lies ahead in the market is that these numbers are just building “approvals”. Not construction starts or completions. It’s just an approval to build. They may or may not be built. Therefore, if the trend of “maybe” new homes is falling, the likely time for actual dwelling completions to rise is still some years away.

All the while the battle and pressure for people to find rental accommodation continues to build. I wrote recently about rent-bidding by tenants to secure a home. 

There is telling graph here that tracks population change with dwelling completions. In the last 12 months they have become completely disconnected with population growth up by about 50% on the last 8 years (excluding covid) and housing completions down about 25% over the same time.

Understanding the reasons why this has occurred gives us more clues on when the market might change. Analysts are pointing to several factors including.

  • Rising construction costs
  • Increased interest rates
  • Increased government regulation and tax (cost) on providing rental accommodation.
  • Shortage and cost of labour.

The federal government has indicated it will wind back immigration, but this is vital to economic growth. Interest rates may ease in late 2024 and into 2025. Otherwise, there is not much likelihood of any of these things changing in the next few years. This means we will continue to suffer an apartment and housing shortage for some time.

Consequently, the recent ABS findings flag tricky times ahead for renters who will continue to pay the price for a housing shortage.

For new construction to start this equation needs to be true.

Land cost + construction cost (incl labour) + holding costs + risk or return = end value.

In the current market, the inputs to the new construction equation are less than the end value.

Picking through the components…

Construction costs are unlikely to fall as they almost never have historically after rising.
The risk or profit margin is pretty much fixed and is in fact rising due to market uncertainties.
That leaves either holding costs (incl int rates and govt charges) or land values to fall. Many developers are holding development sites so that amount is already baked in.
The only other part of the equation is the end value of the asset. That needs to increase a lot to make new construction feasible.

As you can see the development equation is pretty tightly squeezed already. It is hard to see how new dwelling construction can commence with any meaningful impact in the near future.

Brian O’Rourke is the Director of Rork Projects who recently went into voluntary administration. In explaining the reasons for his decision, he said in part.  “Builders are in crisis because of high interest rates, labour shortages and material supply constraints following the pandemic. The construction market is facing one of the worst storms since the mid-1970 crisis. While devastating for us, it is also damaging to the Australian economy and community.”

Owners of existing residential property are well advised to hold and see what the next few years has install for both rental and capital values.

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