Australian rents are still falling at the fastest pace on record

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The cost to rent in Australia is still falling at the fastest pace on record.

According to the latest CoreLogic rental index, rents across Australia’s capital cities fell by 0.3% in July, leaving the decline from a year earlier at 0.6%. The year-on-year drop is the steepest recorded since the survey first began in 1996.

Nationally, at $483 per week, median rents are now back to where they were in December last year. By type of dwelling, the median rental rate for houses now stands at $485 per week, down 0.9% on the levels seen a year ago. Unit rents have fared slightly better, rising by 1.0% over the same period to $467 per week.

While the unit market tends to get most attention, there are currently more houses than units available to let, helping to explain the overall decline in median rental rates.

CoreLogic notes that house rents are currently falling at the fastest pace on record, while unit rents are increasing at a historically slow pace.

The table below from CoreLogic shows the change in rents across Australian capital cities, along with gross yields for investors.

And the following two charts looks at the annual change in rents for both houses and units, overlaid against rental yields.

From a combined capital perspective, gross rental yields for houses currently stand at 3.2%, lower than the 4.1% level for units. The decline in yields over the past year has been exacerbated by the twin effect of higher houses prices and declining rental costs.

Looking further ahead, the group expects that weakness in rental growth will likely persist for sometime yet.

“Housing supply, and subsequently rental supply is continuing to rise and set to increase significantly over the coming years given the level of stock under construction,” says CoreLogic. “As growth in wages and the population continues to slow, it is unlikely we will see a turnaround in rental markets in the short-term.”

While not great news for housing investors, that, says CoreLogic, is a boon for those willing to rent.

“Renters will continue to have more choice and will likely be able to move into superior rental accommodation for similar or even lower costs,” it says, noting investors looking to increase rents could face difficulties given “soft rental conditions and substantial ramp-up in housing supply”.

According to research released by UBS earlier this month, growth in Australia’s housing supply still has a long way to go yet, suggesting that the cycle — even after the enormous surge in construction already seen — is only two-thirds complete.

The bank is forecasting a super-cycle in high-rise apartment completions over the next two years, predicting they will increase by another 50% to around 110,000 per annum, or double the pre-boom trend.

While the sheer volume of new housing supply will add to downside price pressures — not only for rents but also unit prices — it could also place further pressure on consumer price inflation given housing rents make up a considerable chunk of the ABS’ CPI basket.

“The significant increase in apartment supply in train is likely to weigh on rental growth further, which is a large component of the CPI basket and means that the RBA will find it difficult to return inflation to its target band in the near term,” wrote the NAB late lasst month month.

“Either way, given the significant new apartment supply in prospect over coming years, the RBA is likely to have to get used to, to some extent, subdued core inflation readings for some time,” it added.

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