The Australian Bureau of Statistics (ABS) has released a new article shedding light on the private rental market in Australia.

Using a vast dataset of rental properties, which is an input to the Consumer Price Index (CPI), the report indicates a recent surge in CPI rent inflation.

The study reveals that rents have increased in inner-city and regional areas across all states since 2021. In contrast to the COVID-19 pandemic, where rents fell in many suburbs near central business districts, they have now increased in regional areas, driven by a preference for more space among households and net population flows.

Furthermore, rent increases have become more common and larger on average, particularly for the 2-3% of properties that have a change in tenants each month.

But first, a little background.

Having access to affordable and appropriate rental accommodation is vital for the well-being of renter households. Close to 30% of all households rent their homes in the private rental market, according to the 2021 Census, a share that has increased in recent decades.

Data from the 2019/20 Survey of Income and Housing (SIH) indicates that renters usually have lower incomes than owner-occupier households, spending a more significant percentage of their disposable income on housing costs. Typically, the median private renter spends approximately 26% of their weekly income on rent.

Additionally, rents, including public and private, make up roughly 6% of the CPI basket, the second-largest expenditure class. As such, understanding the rental market is crucial for policymakers since it can affect the consumption and savings patterns of households, as well as inflation.

The rental market in Australia has been tightening since late 2021, with vacancy rates declining over this period (see Figure 1).

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During the COVID-19 pandemic, lockdowns and health concerns led many Australians to seek more space and live with fewer people, resulting in a decrease in the average household size. This reduction is estimated to have contributed to around 120,000 additional households, with some of this demand being felt in the rental market.

Furthermore, the return of international migration, particularly international students, has added to the demand for rental properties in the major cities.

As a result, advertised rents have significantly increased, making it increasingly challenging to find suitable rental properties as vacancy rates have fallen. This information is crucial for anyone looking to rent a property or invest in the rental market.

Figure 1: Rental vacancy rates*, seasonally adjusted

The latest data shows that rents have gone up, although advertised rents have increased more than CPI rents. According to Figure 2, CPI rents increased by approximately 5% from February 2022 to February 2023.

It’s worth noting that advertised rents refer to the asking price for currently unoccupied rental properties, while CPI rents measure price changes for the entire stock of rentals. This information is critical to consider when analysing rental market trends and their potential implications for inflation.
The new rents dataset

The Australian Bureau of Statistics (ABS) has recently launched an exciting new dataset of rental properties. This dataset comprises information entered by property managers and covers 32% of the national rental dwelling stock. It includes crucial variables like weekly rent, property type, and lease dates, among others.

However, it’s worth noting that this dataset only covers private rentals without any rental assistance. Regardless, it’s a valuable resource for policymakers, renters, and investors alike. Why? Because comprehending the rental market is crucial as it has an impact on the broader economy and affects the consumption and savings patterns of households.

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Rental market characteristics

Figure 3 shows that median rents have been steadily increasing in all states since 2021. The ACT has the highest median weekly rent at $560, while South Australia has the lowest at $380.

On lease agreements – while most are for 12 months or less, there has been a decline in the share of six-month leases in favour of 12-month leases, as seen in Figure 4. However, it’s important to keep in mind that these figures only reflect currently valid leases. Many renters may enter into a new lease or month-to-month arrangement once their lease expires.

Figure 5 shows that approximately 2-3% of rental properties experience tenant turnover each month, which has remained relatively stable over the past four years. It’s essential to understand this turnover because it helps to explain the difference between advertised rents and CPI rents.

Although advertised rents have increased significantly lately, they only represent a small portion of the rental market, so their impact on the CPI measure of rents has been minimal.

Regional versus capital city rents

Since 2018, more than a quarter of all rental properties have been in regional areas, making it possible to study rent inflation geographically.

The COVID-19 pandemic has significantly impacted rents, with changes in population flows, household preferences, and vacancy rates being the main drivers. Inner-city rental markets experienced a drop in demand during the pandemic, caused by a decrease in international students and business travel.

As a result, some landlords started offering short-term holiday rentals on the long-term market. On the other hand, rents in regional areas farthest from capital cities have increased the most due to net population inflows and low vacancy rates. These factors have resulted in a divergence in rent inflation across capital cities and regional areas.

During the pandemic, rent decreases were observed in some capital cities due to a surplus of rental properties and reduced demand caused by travel restrictions and lower population growth. State governments responded by allowing tenants who lost their jobs or income due to COVID-19 to negotiate rent reductions.

Inner-city Sydney and Melbourne were hit the hardest, with a high number of renegotiations and a significant increase in available rental properties caused by international travel restrictions (Evans, Rosewall, and Wong 2020).

However, rents have since rebounded in both capital cities and regional areas, increasing by roughly 6% over the year to February 2023. It is worth noting that this increase is higher than the 4.8% rent inflation published in the monthly CPI indicator for this period since the CPI includes public rental dwellings and rental assistance properties.

Rents in many inner-city areas remain below pre-pandemic levels

Inner-city suburbs in Melbourne and Sydney still have rents below pre-pandemic levels despite an increase in 2021. According to the 2021 Census, 20% of capital city rental dwellings have rents below pre-pandemic levels, while 20% have experienced rent increases of at least 10% since March 2020.

Factors such as higher vacancy rates and larger declines in migration have resulted in slower rent price increases and further declines in Sydney and Melbourne, including a higher prevalence of rent reductions. However, the rental market has recently tightened significantly in inner-city areas, leading to large rent increases for new tenancies.

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