This ratio helps explain why rents are stagnating

Francois Nascibemi/AFP/Getty Images

Australia is building an enormous number of apartments right now, the largest number on record.

It’s raising concerns of a glut forming in some markets, paving the way for a potential slowdown in price growth, or even outright price declines.

While the debate on what will happen is unlikely to be resolved anytime soon, there’s little doubt that the high-rise residential construction boom is placing a lid on rental costs.

It has and is, as shown in the chart below from the National Australia Bank. It shows the annual change in Australian capital city rents from the ABS’ quarterly consumer price inflation (CPI) report going back to 1990.

Nationally, rents grew by just 0.7% in the 12 months to June, led by a slowdown in Sydney, Melbourne and Brisbane and outright rental declines in Perth and Darwin, Australia’s major mining capitals.

Other private surveys from the Real Estate Institute of Australia and CoreLogic suggest that rental growth has slowed even further with rents actually declining in most capital cities over the past 12 months.

According to Tapas Strickland, an economist at the National Australia Bank, change in rents “has a close relationship to population growth and new dwelling supply”, suggesting that it “can be captured in the ratio of the new population to building approvals, and mapping this to rental growth”.

That’s exactly what Strickland has done in the chart below.

It looks at the ratio of population growth to building approvals, overlaying the results against the annual change in rents from the ABS’ CPI release.

“According to this ratio, there are now 1.4 new persons per new dwelling being approved, the lowest the ratio has been since 2005, and contributing to slower rental growth,” says Strickland.

“Calculating this ratio by state reveals the ratio is the highest in Victoria (1.7) and New South Wales (1.5), and the lowest in Western Australia (1.1) and Queensland (1.2).”

Strickland suggests that “there is little prospect for a lift in rental growth in the near future”. He also notes that with recent building approvals data remaining firm, “the risk is for rental growth remaining lower for longer”.

The sentiment expressed by Strickland follow similar observations from the Reserve Bank of Australia.

In its October monetary policy statement, the RBA noted that there is a “considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities,” acknowledging that current “growth in rents is the slowest for some decades”.

Based on the outlook for population growth and dwelling supply, that trend looks set to continue for some time yet.

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