Three reasons why rent growth will slow in 2024
Rent values rose for the 35th straight month nationally in July.
However, monthly rental growth has declined over the past four months. In regional Australia, rental value growth has slowed since April last year, and rents are close to stabilizing (albeit at high levels).
Slowing rental growth is expected to be one of the major trends in the housing market next year, for several reasons.
First, the cash rate is expected to fall, which could lead to increased investment and first home buying activity.
Second, income growth is expected to slow, which may lead to a change in housing preferences.
Finally, extended rental affordability may lead to relocation to more affordable areas, and base effects mean there will be a limit to how high growth can get. These factors are broken down in more detail below.
1. Rents move with interest rates, and interest rates could be on their way down next year
Annual growth in rental values and interest rates move together over time. Figure 1 shows the rolling annual growth in the CoreLogic Rental Value Index against the Reserve Bank of Australia’s cash rate target.
RBA cash rate target and rent growth
In 2024, all major banks now expect a decline in the cash rate. Lower interest rates can increase demand from housing investors, and increased investment purchases increase rental supply, which could lead to lower rental growth.
Expectations that the Reserve Bank of Australia will raise interest rates in 2023 may contribute to an early recovery in investment activity. Figure 2 shows the increase in new secured investment loans since the beginning of the year. Investment loans offset the rate at which new investment listings are added to the market.
Number of home loans to investors secured against listed properties
2. Weak income growth can lead to a change in housing preferences
Household income growth has turned higher during the pandemic. Initially, income growth was supported by the largest peacetime fiscal stimulus package on record, and later, tightening labor market conditions supported wage growth. The ABS measures of total household income in the national accounts have averaged 1.4 per cent per quarter since the start of the pandemic, almost double the growth rate of the previous five years (0.8 per cent).
Income growth is likely one of many factors contributing to the disintegration of shared homes during the pandemic. People could afford to rent more spacious properties, which contributed to lower inventory levels as families spread out in the housing market.
However, income growth may be another measure of the slowdown next year. Monetary policy began to take its toll on demand reduction in the economy, the unemployment rate rose to 3.7 percent as of July, and annual growth in the CPI slowed to 3.63 percent in the latest edition.
As income growth slows, renter households may look to adjust their housing situation and reconfigure shared homes.
In regional Australia, average household size has returned to pre-pandemic levels and is starting to rise across capital cities combined.
3. Rental affordability is stretched
The high growth in rental values has seen an increase in the share of income required to service new rentals, which was estimated at 30.8 per cent nationally in March 2023 (the highest level since June 2014). CoreLogic’s measure of rents has risen 29.3 percent since its low in August 2020, or the equivalent of a $134 rise in average weekly rents.
Rental value growth is likely to slow due to base effects alone, but renters also tend to be on lower incomes, meaning there may be a cap on how far rents can rise before renters adjust their housing preferences. As mentioned in the previous section, this may look like more cohousing.
It can also appear in patterns of internal migration. In the 12 months to June last year, ABS data showed more affordable rental markets such as Logan-Beaudesert and Ipswich with the first and third highest volumes of net internal migration across the country.
This surpassed the Gold Coast, which recorded the highest net internal migration the previous year. Such inward movements could dampen demand in more expensive rental markets, leading to lower growth in national rents.
Most markets are now witnessing a slowdown in growth and a decline in rents
Figure 3 shows the annual growth trend in house and unit markets across capital cities. Most rental markets are now seeing slow or declining growth. Canberra rents are seeing a sharp decline, and it looks like house rents in Hobart will soon follow.
Annual change in house and unit rents
Rental values also fell in the 12 months to July across a handful of SA4 markets, including south-east Tasmania (down 4.5 per cent), the Southern Highlands and Shoalhaven (down 3.8 per cent), and the New South Wales metropolitan area. (Declined by 3.8 percent). 1.3 percent).
Slowing rent growth does not mean we should neglect reform
Importantly, although we are likely to see a further slowdown in the pace of rent increases, rental affordability challenges are likely to persist.
Beyond cyclical factors slowing rental growth, more can be done to ease rental values and improve rents.
The recent National Cabinet proposals on housing are a great start. An ambitious target of building 1.2 million homes in good locations in the next five years would help bring down rents.
Minimum standards relating to the quality of tenancies are also a positive step to improve the nature of tenure.
Providing more social and affordable housing could also help protect low-income households from the extreme fluctuations in rental values seen in the past few years.
(Tags for translation)Residential