Rental crisis starts to ease

Nerida Conisbee,
Ray White Chief Economist

After seeing the biggest jump in advertised rents ever recorded, we are finally starting to see the rate of increase start to slow. For now it is houses only. Last month, Australian advertised house rents saw the lowest annual increase since December 2021. While the increase is still high, the pace of change is moving in the right direction. With no easing in housing supply and with population increasing at a rapid rate, what’s driving it? And will this easing continue?

The main reason that house rents are starting to stabilise is that affordability issues are starting to take hold. An increasing number of people are unable to afford to live on their own, or in smaller households. This means that more people are looking to share – this includes moving in with friends, moving back home, or with other family members.

This change is most neatly summarised in a particularly clever piece of analysis undertaken by Reserve Bank of Australia earlier this year. This analysis looks at average household size on a monthly basis since the 1980s utilising the ABS Labour Force Survey. Previously average household size was only available through less timely and less frequent surveys such as the Census.

The analysis showed why we saw such strong rental increases during the pandemic, despite seeing such a rapid reduction in population growth. Boosted by higher savings rates, and a desire for more space, more people moved out on their own. One person households hit a peak and more people moved into smaller households. This created higher levels of household formation and the number of people per household hit an all time low.

The analysis also explains why we are seeing rental increases starting to ease right now. In the same way households disbanded, creating lots of new houses, this trend is now happening in reverse. More people are again living together and average household size is starting to increase. This is creating less demand for rental housing

While advertised house rent increases are starting to slow, we are not yet seeing a similar trend in apartments. A particular driver of rents for apartments in Australia are students, particularly those from overseas. During the pandemic, apartment rents dropped dramatically as these students were unable to return to Australia. Since then, the large increases have reflected a recovery in those declines, but also a shortage of apartments that has emerged over the past year. It is likely that these increases will also start to slow now that the surge of students has already occurred.

Although it is good news that advertised rents are starting to slow, we will continue to see increases in sitting rents as the last two years of advertised rent rises flow through to existing tenants. The rental crisis is easing but it isn’t yet over for many tenants. In addition, rental increases will continue to create pressure on inflation for some time longer.

We are not yet at the end of the rental crisis but once it is over, we need to continue to look at ways to prevent similar flare ups in pricing occuring again. Primarily this means ensuring better supply of rental housing through measures such as planning reforms, incentives to owning rental properties and diversification of ownership such as build-to-rent.