What is the future for residential rents?

We are now living in an era of change. The election has been decided, interest rates are on the rise, we are accepting that Covid-19 is here to stay and that’s the new norm. Rent providers are asking, what are the expectations for future rents in metropolitan Melbourne?

There are several factors which are influencing the answer to this question:

  1. The influx of foreign students
  2. The return of tourism
  3. Rising interest rates
  4. The squeeze on the labour market
  5. The interruption to the supply chain
  6. Inflation and the rising consumer price index

Let’s start by looking at housing demand in general and more specifically at the higher density housing sector. The chart below demonstrates how the gap between the median house price and that of units in Melbourne has grown in the last two decades. The gap currently stands at almost $400,000. As interest rates rand the cost of living rise, affordability to purchase becomes front and centre. It is reasonable the expect higher demand for units resulting in higher values.

The tourism surge will remove short stay accommodation from the long-term market, foreign students will occupy many previously vacant properties and individual rental households will be reduced in size as full employment will allow tenants to find separate housing rather than sharing or residing with family. In line with higher demand for units will come a resultant shortage of rental accommodation and an upward push on rents.

Another factor affecting supply, is the disruption to the supply chain causing new apartment completions to be delayed.

We are already experiencing a much tighter market compared to the previous two years. Inner city rents are trending higher and in many cases are rebounding off Covid lows. We have seen rises in Melbourne’s CBD of more than 15%.  Rents are still lower than 2019 however the gap is narrowing. Vacancies have fallen from around 9% to less than 2% in recent months.

The result is an improvement in rental yields with a clear trend emerging.

Another encouraging indicator of a stronger market is the rise in investor participation and lending. There has been a clear rise in investor interest with a proportionate decline in first home buyers. However, with several government housing incentives on offer, it is likely that first home buyers will return.

Another encouraging indicator of a stronger market is the rise in investor participation and lending. There has been a clear rise in investor interest with a proportionate decline in first home buyers. However, with several government housing incentives on offer, it is likely that first home buyers will return.

The final factor affecting values, is the turn around in Victoria’s population growth. This has come following the end of the dreaded lockdowns and the strength of the local employment market. This will further fuel a tightening of availability.

One final comment regarding interest rates and affordability. Although rates are anticipated to rise in the outlook period, the economy is in a solid position to absorb these circumstances with many household well ahead of the repayment curve with more than a two year buffer.

In conclusion, with the many influencing factors outlined above, the rental market in greater Melbourne and more specifically in the CBD is anticipated to improve over the coming months. It will likely reach pre-pandemic levels in the not-too distant future.