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The rental market is tightening, pushing up rents

The rental market is tightening, pushing up rents

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We are moving into a period of strong rental growth and tight vacancies, both in Melbourne and across Australia.

As reported in the AFR this week, research by Domain shows vacancies have plummeted over the last 12 months to 1% nationally which is pushing up rents. While some of this growth is catching up from the Covid decline, the consensus is, it will continue to grow past the pre covid levels due to structural factors driving the growth.

To understand how long this will last and how far it will go, we need to understand the main drivers. These are set out below as they relate to Melbourne, but most of them are at play to a varying extent in most other markets across Australia.

  • Domestic and international travel has increased dramatically in the last 5 months including tourism, business, events, and international students with the growth likely to continue.
  • 80% to 90% of investment owned property that is offered for sale is being bought by owner occupiers thereby removing properties from the rental pool.
  • The land tax bill for many international investment owners is becoming excessive which encourages them to sell with home owners being the predominant buyer, again reducing the rental pool.
  • New construction of apartments (and especially investment market apartments) has slowed dramatically due to several factors and is unlikely to meet demand for many years.
  • Developers with large numbers of unsold apartments are reluctant to offer them for lease as it makes them harder to sell, and moves it from new to used which extinguishes some tax benefits for the buyer.
  • Owing and managing investment property has become more expensive with additional regulations making the financial return less attractive (prior to forecast rental growth)

The recent and forecast rise in rents will make investment property ownership more attractive and encourage investors to enter the market. This will help redress the fall in the rental pool, but most of the factors listed above are more structural and will take longer to adjust. There are additional factors like the inevitable rise in interest rates that will make property investment more expensive which again tempers new supply.

Consequently it looks like the tight vacancies and increasing demand will drive rental growth for the next 2 to 3 years.

Quite rightly Tom Elliot on 3AW took aim at the Greens policy to cap rental growth saying it was “economic muddle-headed thinking”. This policy would be a disaster for renters as the pool of rental property would shrink even further.

Photo by Francesco Gallarotti on Unsplash

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