Rental ruptions: the winners and losers

Housing is a fundamental human requirement, providing both shelter and security. The focus of housing affordability is often on home buyers; prices, interest rates, deposits.

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But with an increasing share of Australians renting their home, it is imperative we also look at rental metrics when thinking about housing affordability. Home ownership is not for everyone - but secure housing is. Whether it is to buy or rent, access to housing at an affordable price is a necessity.

"The fluctuations in the rental market will directly influence investor demand over the next few years.”

In the current crisis, the rental market has been more heavily affected than the buyers’ market, with a combination of falling demand and rising supply.

Households who rent have been more widely impacted by the virus. People who work in the hospitality sector, where job and income losses have been the deepest, have a much higher likelihood of renting than owning homes. And while there has been a formal program to defer mortgage payments, relief for renters has been much less defined.

Rental market conditions will ultimately drive investor behaviour. Many Australians choose to save through investment in housing. The fluctuations in the rental market will directly influence investor demand over the next few years and flow through to both prices and construction -  and in turn measures of housing affordability.

Already weakened

One of the most impacted sectors of the housing market in the wake of COVID-19 has been the rental market. Due to a mixture of negative demand and supply shocks, rental market conditions weakened over April and May. This came off the back of an already ‘weak’ rental environment, where annualised growth in rents has been subdued at 0.9 per cent across the capital city markets for the past five years.

COVID-19 has uniquely impacted demand for rental accommodation. Demand for rental properties fell with the onset of the pandemic, which is reflected in both rental prices and rental listings. This was likely most attributable to:

  • A disproportionate loss of income in industry sectors where workers were more likely to be renting; and
  • The closure of Australian borders to international travellers and migrants, who tend to rent when they first arrive rather than buy.

However, as with property values and transactions, Australia does not have a ‘single’ rental market. Australia has a collection of thousands of different rental markets with variations in demographic and workforce compositions, levels of supply and price points. 

Before the onset of the pandemic in Australia, investor participation in the housing market was at its lowest since 2001. Investor finance fell sharply over April due to high levels of uncertainty. If sustained, this suggests the decline in demand for rentals could be partially offset by a decline in the supply of rental property.

Though as with many housing market and economic indicators, rental market conditions eased from April to May.

There are mixed opportunities for landlords and tenants across Australia, depending on where they are located. For tenants, inner-city areas of Sydney and Melbourne present the greatest opportunity for negotiating a reduction in rent. For landlords, these same areas pose greater short-term risk.

Rental affordability already showed signs of deteriorating in four of the eight capital city markets over the year to March 2020. Affordability may deteriorate further in the coming quarters due to job and income loss.

For renters who are less affected, or unaffected by the COVID-19 downturn, affordability may improve markedly, depending on the region in which they are located.

Ultimately, the opportunity to secure lower rents is unequal across industry and location. Rental growth has broadly tracked below inflation and income growth and rental affordability has held quite firm across the capital cities.

However, for relatively unaffordable markets like Hobart, broad-based affordability measures should be considered for longer term improvements in affordability, rather than relying a global pandemic to reduce demand.

Lasting impact

Housing affordability will remain a key focus for policy makers, with the COVID-19 crisis only exacerbating the challenges facing governments. The pandemic and its associated economic shock will have long lasting impacts on housing affordability.

The financial impact has not been evenly felt and the stimulus measures designed to offset it will have varying impacts of their own.

Overlaying these issues is the persistent problem of low income growth which will continue to be a challenge for policy makers.

Felicity Emmett is Senior Economist at ANZ and Eliza Owen is Head of Australian Research at CoreLogic

Click here to read the full ANZ CoreLogic Housing Affordability report


The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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