Home Insights Why are rental markets so tight right now and what’s likely to happen next?

Why are rental markets so tight right now and what’s likely to happen next?

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Whether it’s Brisbane, Adelaide, Canberra or Sydney, finding a rental property at this point is a tough prospect for tenants, as prices are rising due to fierce competition and limited supply.

Advertising rents have skyrocketed in the last 12 months.

Nationally, the median rent advertised on realestate.com.au was 9.3% higher in April 2022 than in April 2021. And this rapid growth is happening all over the country.

For Brisbane, Adelaide, Canberra and Hobart, this is a continuation of what happened between late 2020 and 2021.

Since mid-2020, advertising rents have risen sharply in all of these cities, after a slight drop at the start of a pandemic in some locations.

For Sydney and Melbourne, this rapid growth is a change.

In Sydney and Melbourne, advertising rents fell for most of 2020, from early to mid-2021. There has been a significant drop in some areas, with advertising rents in the interior of Melbourne dropping by a quarter.

As a result, despite this year’s rapid growth, advertised rents are below pre-pandemic levels in many parts of these cities.

Why is rent growing so fast?

The simple answer is that rental demand is strong, there are vacancies, and there are relatively few rental properties on the market for tenants to choose from.

In other words, rental competition is fierce and prices are skyrocketing.

That’s a simple answer, but it’s also incomplete. Why is the supply so limited? And why is the demand so strong?

Supply is limited due to investors fleeing

Many investors are part of the reason for the supply shortage Sold out in 2020 and 2021That means that the rental inventory is low. If all other conditions are the same, low inventory of rental properties means less rent available and the rental market is tight.

It helps explain the lower rental inventory.But this dynamics is also needed, so we can’t fully explain why the rental market is so tight. Lowered Rental demand.

The supply of rental properties has been severely constrained over the past few years.Photo: Getty

The investor who sold the rent had to sell to someone – another investor (which has no net effect on the rented stock) or had to sell to his own home.

If those owners are the first homebuyers who were formerly renters, the net impact on the rental market should be negligible. There will be fewer rental properties, but fewer rental households.

That dynamic is part of what we’ve seen in the last few years. In 2020 and 2021, far more homebuyers purchased than usual in the last decade.

Strong rental demand is a bit of a puzzle

If anything, it should be much more Few People who are considering renting more than before the pandemic.

First, there are many first home buyers, who will mainly come out of the pool of potential renters.

Second, and more importantly, the population aged 20-29 – important demographics for rent [1] – Actually, it has decreased in the last two years because the transition stopped when the border was closed.

But rental demand isn’t just about how many people are trying to rent. The size of the average renter’s household is also important. [2]

If anything, the number of people who want to rent is decreasing, so the average household size is getting smaller, so the demand for rent may be strong.

This can happen in several ways.


The size of the home seems to have shrunk during COVID-19.Photo: Getty

First, during the pandemic, share houses may have become less common or smaller. Instead of renting a four-bedroom share house, you may prefer to rent a one-bedroom or two-bedroom apartment.

Second, some people may have bought a villa for private use. For example, someone bought a beach house to work remotely while maintaining an existing house and neither rented it. Currently, households are spread over two dwellings, so the average household size is smaller.

Unfortunately, Australia lacks timely data on these two dynamics.

However, the evidence we have supports the first dynamic and suggests that the renter’s household has become smaller.

Units and small dwellings are an increasing share of what can be rented at realestate.com.au, which is consistent with people moving to smaller share houses and having fewer roommates.

The Reserve Bank of Australia Last week, we also shared some data showing that share house penetration has declined and the average household size has shrunk.

This is also true in the United States, where more timely data on household size is available. There, the percentage of people living alone is increasing, and the percentage of people living with roommates is decreasing.

Therefore, the evidence we have supports the hypothesis that renters are in high demand due to smaller households.

Unfortunately, there is little public data on the second hypothesis. I don’t know if there are more vacant houses than before.

The best data we have about an empty house comes from the census. However, it is only available every five years and the 2021 census results will not be announced until later this year.

What’s next for the rental market?

Rental demand is unlikely to ease soon, especially with the reopening of the border.

Population growth in the lessor age group will recover as migration resumes, which will drive rental demand, especially in the city center. Preferred by recent immigrants..

Airport plane house

Resuming the transition after COVID will put further upward pressure on demand.Photo: Getty

Higher rents make living in a share house more attractive than living alone, so household size probably won’t continue to shrink, and dynamics can even be reversed.

It could at least stop the increase in rental demand and even reduce it a bit.

On the supply side, there is also some good news. Investors are returning to the market and it will begin to bring more rent. There is also a substantial pipeline of new homes under construction, some of which will be rental properties, increasing rental inventory.

But it’s a slow process. The number of new investors purchasing into the rental supply pool is small compared to the approximately 3 million rental households.

As a result, published rents may continue to rise vigorously for the foreseeable future.

[1] According to 2011 census data, the 20-24 and 25-29 age groups account for the highest percentage of the 5-year-old age group (although the 30-34 age group does not. I’m not late).

[2] The dynamics here are much more complicated for household formation and households. Depends on it How expensive is the rent, what other options are available (such as living at home), how expensive it is to buy, and whether it is feasible. But for now let’s ignore those dynamics.

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