Why are rental prices still rising and what’s going to slow it down?

If you’re a renter, you’re likely very well aware that Australia is in the midst of a rental crisis.

Over the past 12 months alone, rents have surged, 11.8 per cent according to PropTrack, and while the rate of growth is slowly easing, it’s still likely that renters will be facing more rent hikes in the months ahead.

While there’s never only one factor that impacts any segment of the property market, there are certainly a few key drivers that have contributed to the current rental crisis.

Immigration

On the demand side, there is little doubt that immigration is rapidly increasing the need for housing. The Government has flagged that nearly one million new arrivals will be landing on our shores over the next few years, which is a huge jump from what we've seen in the past.

During the Howard era, annual immigration levels were only around 100,000. This increased after the GFC to around 250,000 per year until it went to virtually nothing during the COVID era. Now the Government has supercharged the level of immigration, and there's little doubt that this is putting huge pressure on the housing market and also things like infrastructure.

New immigrants typically rent when they come to Australia, and that means that the rental market has been bearing the brunt of this.

Students returning

One of the other big changes that we've seen this year in particular has been the return of international students. China, in particular, is one of the biggest contributors to our student population, and during the lockdown period, many Chinese students didn’t come to Australia.

Many were working remotely until the Chinese Government changed their policy and said that they needed to complete their studies in person. This meant that there was a wave of students that needed to find accommodation at the start of 2023 with estimates of around 40-50,000 returning at the start of the year. The government has also made it a lot easier for students to come to Australia and work more hours, which is encouraging more students to come to Australia who also need housing.

Smaller households

While immigration is certainly hurting the rental market, it's not the entire story. Rents were starting to rise, and vacancy rates falling ahead of the mass immigration push from the government.

One of the reasons for this was the way that households changed shape during lockdowns. Naturally, people wanted more space, and many people decided to leave things like shared accommodation and rent on their own. This meant that the number of people per household fell during that period of time.

The number of people per household went from 2.55 people per home to 2.48 people according to the ABS. While not a lot on the surface, this in itself saw demand for homes rise by 288,000 as more people wanted homes.

Short-term rentals

Another phenomenon that has been playing out as well over many years has been the number of short-term rentals that are now on the market. These days when you go for a trip, a lot of people will turn to Airbnb to look for an option for a holiday home.

Short-term rentals have proven to be great for investors as well, as they are generally seeing higher yields. This has meant that a large pool of homes have left the long-term rental market and moved into short-stay accommodation. Across the country, there are around 260,000 short-term rentals according to realestate.com.au, which is actually down from the peak of 400,000.

Limited supply

The final piece of the puzzle that has to be addressed is a lack of supply. While there is less supply because of the high level of demand, we are also seeing a decreasing number of homes being built with building approvals down nearly 50 per cent from their highs. We also have more and more investors exiting the market.

When interest rates started rising, some investors decided to sell up and capitalise on the capital growth they've seen over the past few years. Similarly, fewer people were building new homes. And while most people who build are owner-occupiers, if there are more homes built, the overall supply of properties is increasing.

At the same time, when the state and federal governments launched a range of building incentives during COVID-19, there was huge demand. This, in turn, puts a lot of pressure on trades and the construction industry, which are still behind schedule in delivering these homes. Eventually, this will catch up in a number of cities and will help ease some of the pressure on the market.

Win for investors

Tight vacancies and increasing rents are not great for renters, but it is a positive for investors. Investors are seeing strong rental growth in most states and territories, and what this also does is incentivise more investors to get involved in the market. In turn, this will help bring on more supply. While the rental crisis is not something we want to see, hopefully, it does encourage more investment.

It’s also important to understand that on a micro level as well, rental growth is often something that precedes price growth. If renters are having a hard time renting or it’s getting too expensive, they will typically start looking to buy, which in turn puts upward pressure on prices.

If you’re an investor, identifying areas that have a tight rental market and increasing rents can be a great way to find areas that are ripe for future growth. This is even better when it is in a largely owner-occupier-dominated area that also has a tight supply of homes for sale. That’s a great combination for a property investor.