Australia’s rental market is constantly evolving, and while interest rates and migration are often cited as the primary factors driving rent prices, they don’t tell the whole story.

In fact, advertised rents started to surge back in late 2021, a full six months before the Reserve Bank hiked up interest rates. And, net migration was actually in the red zone when rents started to rise.

But what other factors are at play in this ever-changing market? Rental vacancy rates, economic changes, and lifestyle preferences shifts can all contribute to rising rents. 

If you’re a renter, it’s crucial to understand the current rental market and how it affects you. Keep an eye on rental vacancy rates in your area, and be aware of any economic changes that may impact rent prices. And, if you’re considering moving, make sure you research and understand the rental market in your new area.

TL;DR (Too Long; Didn’t Read)

  • Rents spiked six months before interest rate hikes and during negative net migration.
  • The average number of people per household fell significantly during COVID, leading to a demand for more houses and apartments.
  • The decline in Australians residing in group houses is just one aspect of a larger picture of supply and demand imbalance in the rental market.
  • Advertised rent increases are a sign of future price hikes for ongoing tenants.
  • Rent inflation is predicted to remain “quite high” for an extended period despite the housing supply struggling to meet demand.

Beyond interest rates and landlord dynamics, supply and demand are at play

The rental market is a complex beast, and a range of factors can cause rising rents. While interest rates are often blamed for rent increases, it’s not always that straightforward. Landlords selling to other landlords can maintain the supply of rental properties, but changes in demand can still significantly impact prices.

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During the COVID pandemic, the demand for rental properties changed dramatically. With the average number of people per household dropping from over 2.6 to under 2.55, there was suddenly a demand for around 140,000 more houses and apartments than before. This shift in demand caught the building industry off guard, leading to rising rents.

Why did people suddenly want to live with fewer roommates? Some experts suggest that COVID and lockdowns made us more selective about who we wanted to share our space with. Whatever the reason, it’s clear that rising rents are driven by more than just interest rates and migration patterns.

Small changes, significant impact.

The pandemic brought about a significant drop in the number of Australians living in group houses, with many renters choosing to move in with their partners instead.

But this shift is just one piece of a larger puzzle. When demand and supply for rental properties are relatively balanced, as they were pre-COVID, even minor fluctuations in either can lead to rapid price changes.

That’s why the sudden change in demand caused by the shift to smaller households caught the building industry off guard, leading to a surge in rental prices.

Advertised rents are a key indicator.

Despite the seemingly steep increase in advertised rents, the reality is that most renters have only experienced modest price hikes. While capital city rents advertised online have increased by 13% in the past year and regional rates by 9%, the average rents that renters pay have only increased by 4.8%.

Landlords tend to raise rents charged to new tenants more rapidly than to ongoing tenants. This may be because landlords prefer to keep their existing tenants happy or because renters usually sign fixed contracts for the first year.

However, as renters eventually move on, landlords become less attached to them, and more renters end up paying the advertised rents. As a result, the rise in advertised rents is a concerning sign of what’s to come.

Despite the volatile rental market, renters can take comfort that advertised rent increases don’t necessarily mean significant price hikes for ongoing tenants. Nonetheless, as more renters move out over time, the advertised rates will likely become the norm for a growing number of renters.

According to Reserve Bank Governor Philip Lowe, the Australian population is expected to grow by 2 per cent, similar to the peak during the resources boom. Meeting the demand for housing won’t be easy. The last time there was a surge in population, it took five years for the housing supply to catch up.

Lowe suggests solutions like embracing group homes or staying with family members might be necessary. Despite this, he also warns that rent inflation, which was very low pre-COVID, is expected to remain “quite high” for an extended period.