Even with a historic fall in property prices, rents are expected to increase by up to 10%. Will they ever come down?

With news that house prices are falling sharply in several capitals, millions of tenants could be eager to pay the landlord a little less.

CoreLogic data released this week shows house prices in Australia are falling at their fastest pace since the global financial crisis.

The median price in Sydney has seen the biggest drop in value in nearly 40 years, while values ​​in Melbourne, Hobart, Brisbane and regional Australia also fell last month.

So rents should go down too, right?

Bad. For most of the 2.4 million households renting from private landlords, rents will rise at a historically rapid rate over the next year.

Here’s why.

Prices go down, but rents keep going up

Rents jumped about 2.8% in the last quarter and are expected to rise further, said CoreLogic research director Tim Lawless.

“We have already seen rents increase by 9.8% year over year to July,” he said.

“By this time next year, I wouldn’t be surprised if there had been a similar increase of around 10%.”

The graph below shows the relationship between housing values ​​(houses and apartments) and weekly rents from 2010 to 2022.

As you can see, for most of the last decade, rents have painfully increased while housing values ​​have fluctuated more wildly.

Basically, there is no short-term relationship between the evolution of housing prices and the amount that tents pay their owners.

Since August 2020, the fairly flat and predictable trajectory of rent increases has taken an upward turn.

In fact, the increase has been so steep that Mr Lawless expects us to be approaching a “ceiling” on what tenants are “able to pay”.

“Rent affordability is already tough, and it’s going to get worse,” he said.

“I think a time will come when tenants can no longer imagine higher rents.”

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Home prices fall at fastest pace since GFC as construction costs rise

Interest rates, returning students and COVID getaways for the wealthy

The reason rental payments will increase as housing prices fall is due to a combination of factors, rising interest rates, the return of international students, and changes in the housing market brought about by COVID.

Higher interest rates mean bigger mortgage payments, which landlords just pass on to their tenants.

The return of international students with the opening of Australian borders will increase the demand for rental accommodation.

A bird's eye view of a leafy suburb full of homes.
Since the 1990s, housing prices have risen from 2.5 times annual household income to more than six times today.(Provided by: ACT Department of Environment, Planning and Sustainable Development)

The recovery in tourism will also have an impact, said Chris Martin, a researcher at UNSW’s City Futures Research Center.

“There have probably been properties that have moved from the rental business to Airbnb and the tourism business,” he said.

The pandemic has also seen more people with higher incomes owning vacation homes that they are not renting out, he said.

“If this happens often enough, it would affect rental supply and could make rents even more expensive for people,” he said.

This increased demand and reduced supply will be offset by more tenants returning to shared homes, CoreLogic’s Tim Lawless said.

“Rental households have gotten smaller during the pandemic as renters have been looking for space,” he said.

That is, couples and people living in shared homes moved into their own accommodation, which meant they paid more for rent.

This was highlighted in a recent speech by Luci Ellis of the Reserve Bank, who noted: “On the question of who you’d rather be locked up with, at least some Australians voted with their movers’ van, leaving their shared home and with their partner.”

That trend will likely reverse as rents rise and shared-home reform is a mutual financial benefit, Lawless said.

“Tenants may need to occupy the room they used as a home office,” he said.

The changing “bulge” of the rental market

But there is another longer-term trend that is also driving up rents.

Because the cost of buying a home is unaffordable for many, Australians are renting longer in their lives and in what Dr Martin calls the “high income years”.

“There have been more households that otherwise in previous generations would have owned, but they are renting,” he said.

“These are higher income homes and can spend that higher income on rental housing.”

This change is illustrated in the table below, which shows the number of houses available for rent at different prices, from 1996 to 2016 (these are values ​​in 2016 dollars, so inflation is not a factor).

Breakdown of private rental dwellings by weekly rent paid
Today’s unaffordable rental market is a “bulge” battle.(Provided: AHURI Final Report No. 323, Australian Housing and Urban Research Institute Limited.)

In 1996 there was a big bulge in properties around the $200 per week mark.

By 2016, it had risen to $500.

Renters who never could afford $500 a week when they were studying 20 years ago now have a career and can accumulate money (even if they would rather pay a lot less).

“The rental market has changed shape and the main driver has been the growing presence of high-income renter households whose price is no longer home ownership,” said Dr Martin.

So what are the prospects?

For tenants, the outlook is not good for at least the next 12 months, Lawless said.

As long as interest rates rise and borders remain open, rents will likely continue to rise, even as house prices fall.

For rents to eventually fall, house prices would have to continue falling for a long period of time, while interest rates would remain low.

And that’s unlikely to happen nationwide, Lawless said.

“If we want to see relief, we need to see the government take a more active role in providing rental housing,” he said.

This included more social and community housing initiatives for low- and middle-income Australians, he said.

Dr. Martin agreed.

“The way I’d like to see rents go down is if we actually had a rental sector with an abundance of nonprofit rental housing,” he said.

“We need a different kind of owner.”

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