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Why Are Rental Markets So Tight Right Now?

No two ways about it, tenants are facing insane amounts of competition for rentals right now after the national vacancy rate fell to 0.9% in July, according to Domain.

The vacancy rate measures the share of untenanted properties, so that result means less than one out of every 100 properties is currently available – which, unsurprisingly, is a record-low result.

It’s also well below the 2-3% rate many consider the sign of a balanced market.

Dr Nicola Powell, Domain’s chief of research and economics, said vacancy rates had been dropping for the past 12 months.

“Nationally, vacant rental listings are 45% lower over the year and have fallen across most of the capital cities,” Dr Powell said.

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As a result, landlords have the upper hand in every capital city with Adelaide (0.2%) and Perth (0.5%) having the tightest rental market.

Sydney’s vacancy rate is at a record-low 1.3%, while Melbourne’s vacancy rate of 1.4% is more than half its level of a year ago. Darwin was the only city to buck the national trend, with the vacancy rate creeping up by 0.1 percentage points to 0.6%.

Rents boom as the vacancy rate plummets

When the vacancy rate plummets, demand starts to outstrip supply, which then drives up asking rents.

You can clearly see this playing out in CoreLogic’s June quarterly rental review, which found rents were rising at their fastest annual pace in 14 years.

Rising interest rates and higher inflation are pouring more fuel on the fire, because they’re increasing landlords’ holding costs – which landlords are then passing on to their tenants.

Why are there so few rental vacancies right now?

While the rental market is very tight right now, that was not the case in Sydney and Melbourne at the start of the pandemic, particularly in the CBD.

Back then, rents were in freefall, because the vacancy rate was soaring as city dwellers fled to regional areas and the international border was slammed shut.

So what happened over the past 24 months to result in such a turnaround?

Exhibit A is the recent property boom that saw the total value of Australia’s residential housing market soar past $10 trillion, according to official statistics. As property prices soared,  affordability deteriorated, locking many first home buyers out of the market. Unable to get on the ladder, they tied up rental stock for longer.

At the same time, many property investors started selling their properties to cash in on the capital gain, tightening supply further.

So once the international border reopened and demand accelerated, tenants had fewer homes to choose from, leading to the situation we are now in.

Landlord’s market likely to last for some time

In bad news for tenants but good news for property investors, CoreLogic research director Tim Lawless said it was unlikely the rental market squeeze would ease in the foreseeable future.

“Despite growing affordability concerns, rental markets are expected to remain tight for some time yet partly due to a shortage of supply following a long period of low investment activity between 2015 and 2021, but also due to renewed rental demand as international migration recovers,” he said.

“Worsening affordability could have a negative impact on rental demand as more people try to minimise costs by maximising occupancy rates or reforming larger households. However, this will likely be offset by additional rental demand as international migration returns to pre-COVID levels.”

Thinking about buying an investment property? Shore Financial can help. To discuss your home loan options and model different financial scenarios, call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.






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