Australia: Rental growth to persist as a key driver of inflation

Australia’s rental market tightened considerably in 2022 with rents growing 13.4% y/y nationally. Momentum has continued in 2023, with an increased volume of tenants competing for a relatively static level of supply, contributing to historically low vacancy rates. Moreover, higher interest rates have significantly lifted the mortgage costs for landlords, who are keen to balance their cash flow through higher rental incomings. Hence, we expect rents to increase by 11.2% over 2023 and a further 4% in 2024.

The strong trajectory of asking rents is increasingly being passed through to CPI rents as it takes time for rental increases to flow through to existing tenants. The latest March quarter saw CPI rents grow 1.6% q/q, the largest rise in fifteen years, with stronger growth yet to come.

What you will learn:

• Three measures of rents: There are three measures of dwelling rents in Australia: advertised, actual and CPI rents. Advertised rents measure the asking price for currently vacant properties. They represent only a small proportion of the rental market with only 2-3% of rental properties changing tenants each month.
  
• The rental market outlook: National rents rose 13.4% y/y in 2022 to $515 per week with the national vacancy rate falling to nearly 1%. House rents have passed peak quarterly growth after having increased significantly during the early stages of COVID as demand for dwellings with greater floor space surged.
  
• What does this mean for CPI rents? It takes roughly a year for changes in actual rents to pass through to CPI rents. The close relationship diverged during the pandemic. COVID rental subsidies such as the Rent Choice subsidy in New South Wales and the Residential Rental Relief Package in Victoria allowed a significant proportion of renters to negotiate discounts or deferrals on their existing leases.