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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 28 January 2016

Rental growth slows

Rental growth slowing

Yesterday's Consumer Prices Index revealed some interesting trends in rental growth to December 2015.

At the national level rental growth of just +1.2 per cent is the slowest we have seen since 1995, which makes a good deal of sense given the great surge in the number of investors and the construction response to rising dwelling prices. 

Essentially this is the opposite of what happened in 1985 when investors exited the market following restrictive changes to tax legislation.

City by city

In most quality locations, rental growth is simply following the cycle, slowing in response to a surge in both construction and the number of investor-owned dwellings.

Annual rental growth remains positive in Sydney (+2.3 per cent), Melbourne (+1.7 per cent), Brisbane (+1.0 per cent), Adelaide (+1.2 per cent), and Hobart (+1.1 per cent).

It is a truism to say that there are diverging trends within those markets, particularly noteworthy being slowing rents in high density and high rise apartment complexes.  

Rental growth has turned negative in Perth and Darwin, following an enormous surge through the mining boom, while Canberra has actually recorded moderately negative rents for the past three years. 

Long run trends

It pays to be wary about analysis calling "plummeting" rental growth, but it is true that the rental market will generally need to slow in order that the high levels of investor stock can be absorbed. 

Eventually stronger rental price growth will return, but only once investor finance has pulled back, and the cycle does take time to work through. 

The long run data shows the cyclical nature of rental growth by capital city. 

Looking at rental growth by year it is clear that while rental price growth been strongest in Sydney over the past five years, over the past decade the resources states have seen the greatest increase in the cost of renting, some of which is now unwinding.