Is the Australian rental boom coming to an end?
The latest CoreLogic Australia Property Pulse data indicates the Australian rental boom is ending. Rental demand weakened in July and August due to lower demand from reduced migration and affordability issues, which caused changes in household formation. New building developments and Investor activity also increased, helping to ease the pressure on rents.
Let’s unpack the key drivers of the decline in rental growth;
Affordability may limit rental growth. Australian wages rose by 12.7%, but rents increased by 36.1%.
Rising rental costs are changing household structures. According to the RBA, the average household in capital cities decreased from about 2.63 to 2.53 members as group households broke apart during the pandemic. This led to increased demand for separate housing rentals. Although the shift back to larger households has been gradual, the RBA indicates that household sizes are growing again. As group and multi-generational households grow, rental demand is expected to decline.
The peak in net overseas migration in the first quarter of 2023 aligns with the peak rate of rental growth across the unit sector in April 2023. ]After reaching a record 165,000 in March last year, net migration dropped to 107,000 by December 2023, a decline of about 58,000. Although this figure is still 1.6 times higher than the average before COVID-19, it represents a significant decrease from the high levels. Data shows a slowdown in foreign student arrivals, suggesting the drop in migration will continue. About 90% of migrants to Australia come on temporary visas, which directly affects rental demand. The decrease in migration contributes to a further drop in rental demand.
Factors contributing to the rental slowdown may include the ongoing completion of new homes from the HomeBuilder program and increased investment activity that boosts rental supply.
Investor activity has increased, with lending to them up 10.7% since June and the total value of loans up 30.2%. Investors are essential for providing rental properties, which may help ease supply issues.
To read the full Property Pulse Report, click on the link below.
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