CoreLogic November home value indices showed a second consecutive month of property value increases following a COVID-19-induced dip. For the first time since January, every capital city recorded a rise in dwelling values. This was off the back of accommodative monetary policy and fiscal policy, converging with a strong increase in consumer sentiment and the beginning of a recovery in economic conditions.

But as property prices move into a broad-based upswing, rents remain a mixed bag. A range of factors have created different results between regions and property types.

The growth in rental values over the year to November is presented in the chart below. Annual growth in rent values is calculated off an index similar to the CoreLogic Home Value index, which imputes rents for every property in the region, and tracks how this combined value changes over time.

Growth in rent values - Year to November 2020


The top performing rental market of the capital cities was Perth, where dwelling rents increased by a remarkable 8.2% in the year to November. This was led by an 8.6% rise in house rents. Unit rents were up 5.4% in the year, which was behind the rate of rent growth for units in Darwin.

While this may spell good news for landlords across Perth and Darwin, it is worth noting that the reason for such strong rental increases are the gradual withdrawal of investors from the market. Investors comprised only a small portion of market activity over the years following the mining downturn. As of November 2020, Perth rent values were still 11.7% lower than the peak in 2013, while Darwin rents were 21.6% lower than the 2014 high.

A time series of rolling annual growth in rents across Perth and Darwin, compared with the combined capital cities, contextualises the recent increase in rents. It shows extreme highs and lows in growth of rental incomes across these cities, and the downturn that rental markets are recovering from.

Rolling annual growth in rent values

 

The rapid rebound in rents could see investment participation bottom out in the residential market through 2021, and start to climb.  ABS housing finance data suggest the investor share of mortgage finance for the purchase of property through September was just 16.2% in WA, and 11.6% in the NT. These are the lowest rates of investor participation of the states and territories.

Meanwhile, Sydney unit rents have been pushed into a deep downswing, falling -5.4% in the year to November. This is partly attributable to a relatively high supply of unit stock in recent years, with unit completions across NSW peaking at 11,566 in the December 2018 quarter, against a 10-year average of 6,315 completions.

Demand-side factors have also pushed down unit rents. Through COVID-19, the closure of international borders was a shock to rental demand for Sydney and Melbourne, where around two thirds of net overseas migration to Australia has been concentrated for the past 3 years. This is because the vast majority of recent overseas arrivals are renters.

Sydney and Melbourne labour markets also had a relatively high portion of workers in hospitality, tourism and the arts, which have been subject to acute job loss through the pandemic, and are sectors where workers are more likely to rent than in other industries.

The median rent value for Sydney units fell to $480 per week, down from $500 in November 2019, and down from a pre-COVID high of $520. However, the monthly decline in Sydney unit rent values has eased to -0.8% in November, since bottoming out at -1.1% through June.

The Melbourne rental market has been one of the most impacted through COVID-19, with unit rents down 7% over the year compared with a mild uplift in house rents. Median unit rents have fallen to $400 per week, down from $430 In November 2019 and a pre-COVID high of $450.

As with Sydney, the decline in Melbourne unit rents was driven by stalled overseas migration, and acute job loss across sectors where workers have a higher likelihood of renting. Unlike Sydney, Melbourne rental demand was compounded by a second wave of restrictions through the September quarter, and an abnormally high next loss of people from Melbourne to other parts of Australia through the June quarter. The monthly decline in Melbourne unit rents has also eased, from -1.3% in August to -1.1% in the month of November.

The rate of decline in unit rents is easing as employment conditions gradually improve across accommodation, food, arts and recreational service industries. Rental demand will be further boosted across Sydney and Melbourne when international travel is once again feasible, though this may not be for some time.

Brisbane is another city where rents have seen divergence between houses and units, though this is not as extreme as the divergence seen across Sydney and Melbourne.

Across the three cities, part of the difference between house and unit performance may not be about renters preferring houses over units during COVID-19, but rather location and stock availability.

Areas further from the CBD of Sydney, Melbourne and Brisbane have been more likely to see rental value increases. These areas further from the CBD happen to be in locations where rental stock is less concentrated, and is also more likely house than unit stock.

This is demonstrated in the charts on the previous page, which show rental markets further from the CBD have a lower concentration of rentals, and that rental properties further from the CBD are more likely to be houses.

While smaller cities have generally seen an increase in rental values over the year, Hobart rents have fallen across both houses and units. This may be a relief to some tenants, where rents across Hobart had grown 34.3% in the 5 years prior to the onset of COVID-19.

Declines in Hobart rents may partially have come from a lack of demand among workers in tourism and hospitality where, as with inner-city Sydney and Melbourne, Hobart had a relatively high concentration of workers.

However, another narrative around the decline in rents in Hobart has been the conversion of Airbnb to the long term rental market adding to supply, at a time when demand was falling. As interstate borders reopen, this may see the return of stock to short term rental accommodation, and see Hobart rental markets once again tighten.

Looking forward, COVID-19 will likely have a lasting impact in terms of varied dynamics between cities and property types. For weaker rental markets such as Sydney, Melbourne and Hobart, rents are likely to remain weak until international travel resumes. Meanwhile, other capital cities, especially those with rapidly rising rents like Perth and Darwin, could see the gradual re-entry of property investors, which would lift rental supply and support an easing in rental value growth over time.