Slowing Rent Price Growth Signals New Trends in Australia's Housing Market

Rent prices have been on the rise nationwide for over 35 months until July, but in the last four months, this upward trend has started to slow down. In regional Australia, the pace of rent increase began to slow down in April of the previous year, and it appears that rents are nearing a plateau, although they remain at high levels.

The expectation is that slow growth in rent prices will become a significant trend in the housing market for the next year. Several factors contribute to this:

Interest Rate Fluctuations: Rent prices are closely tied to interest rates, which are predicted to decrease in 2024 according to major banks' forecasts. Lower interest rates may attract housing investors, leading to more investment purchases, and consequently, an increase in rental properties available. This surge in supply could potentially ease the growth of rent prices. In fact, the anticipation that the Reserve Bank of Australia (RBA) will halt interest rate hikes in 2023 might already be encouraging increased investment activity, as evidenced by the rise in new investment loans since the beginning of the year.

Income Growth Variability: Household incomes saw significant growth during the pandemic due to generous fiscal stimulus packages and a strong job market that supported wage increases.
However, this trend could lose steam in the coming year. The impact of monetary policies designed to reduce demand in the economy, along with rising unemployment rates and slower annual wage growth, may lead to a slowdown in income growth. This could prompt renters to reconsider their housing choices, including the possibility of shared housing. In regional Australia, average household sizes have already returned to pre-pandemic levels and are increasing in major cities.

Strained Rental Affordability: The substantial increase in rent prices has resulted in a higher percentage of income needed to cover rent payments. As of March 2023, this percentage stood at 30.8% nationally, the highest level since June 2014. Data from CoreLogic indicates that rents have risen by 29.3% since hitting a low point in August 2020, equivalent to a median weekly rent increase of $134.

Rent price growth is expected to slow not only due to the base effects but also because renters typically have lower incomes. There may be a limit to how much rents can increase before tenants adjust their housing preferences, potentially leading to more shared housing or influencing internal migration patterns.

It's important to note that a slowdown in rent growth doesn't eliminate the need for housing reform. Despite cyclical factors contributing to the slowdown, there's still room for improvement in rental affordability. Recent proposals from national cabinets regarding housing represent a positive beginning. The ambitious goal of constructing 1.2 million well-located homes within the next five years could alleviate rent pressures.

Implementing minimum standards for rental property quality is another step in the right direction. Additionally, providing more social and affordable housing can protect lower-income households from the extreme fluctuations in rental prices observed in recent years.

Paulette Contessi

Licensee / Director

THE CONTESSI GROUP