Impact of COVID
Charter Keck Cramer’s analysis shows that the rental markets, much like the “For Sale” markets, were incredibly distorted over the pandemic and particularly whilst international borders were closed. This was most acutely felt in many apartment sub-markets in Sydney and Melbourne which rely on students and new migrants for occupier (renter) demand.
The markets of Brisbane, Adelaide, Canberra and Perth, which are less exposed to overseas migration and students, were also the beneficiaries of interstate migration with these rental markets highly stimulated over this period.
A deeper analysis of the rental markets in Sydney and Melbourne shows that in many sub-markets weekly rents fell by -30% over 2020 to 2021 and vacancy rates increased up to 13% in some of these locations. What is interesting is that during this time, many tenants in those cities that had previously consolidated into group rental households were able to opportunistically rent a dwelling on their own and often within a larger space.
The Reserve Bank of Australia (RBA) has prepared an excellent analysis to highlight household formation changes during this period. This is in fact a major explanation for why Melbourne, which delivered elevated levels of supply of BTS apartments in 2020 (a legacy of the previous investor-driven cycle) did not in fact fall into substantial oversupply.
Post COVID performance
It is critical to understand the interplay between the supply of and the demand for rental dwellings across the Australian capital cities.
In simple terms, demand (primarily in the form of population growth) is very elastic and can return very quickly. This has occurred both through increased net overseas migration as well as potential purchasers seeking rental properties after being priced out of the “For Sale” market due to rising interest rates. Supply on the other hand is very inelastic and even in a balanced market which is not suffering from issues such as prohibitive construction costs, weak sentiment, rapidly rising interest rates and slow presales, cannot respond quickly.
This has resulted in a situation where almost every rental sub-market is seeing uncharacteristically high rental growth which is an after effect and continued legacy of the pandemic. These elevated returns are most prominent in markets in Brisbane, Adelaide and Perth.
Charter Keck Cramer’s view is that that rental market, much like the “For Sale” market, will recalibrate and continue to find a new equilibrium. This can happen organically as market forces impacting supply and demand continue to adjust.
Charter Keck Cramer is already observing that households are starting to regroup as rental agreements expire and rents recalibrate upwards. Charter Keck Cramer is also observing that households are making trade-offs and seeking smaller dwelling types (i.e. townhouses into apartments) and bedroom types (i.e.2 bedrooms into 1 bedrooms) in response to rental increases and affordability concerns.
Charter Keck Cramer’s view is that given the significant misalignment between supply and demand, this will occur naturally but will take a minimum of 3 to 4 years or more (at best) given current difficulties to mobilise new supply. This is without Government intervention, which as discussed below, depending on the mechanisms chosen, stand as a key opportunity or key risk to the rental markets.
Given the current circumstances, it is reasonable to expect elevated rental growth in the rental market over the next 3 to 4 years and BTR investors and financiers should be less apprehensive with increasing rental revenue escalations by larger amounts than historical averages to more accurately reflect these market distortions. Once the market moves back into equilibrium, these BTR developers and investors can start to expect lower rates of annual growth reflective of a more balanced rental market.
The use of “blunt” Government interventions such as the closing of international borders (thereby reducing occupier demand) during the COVID-19 pandemic highlights the potentially significant impacts that Government policy can have on the rental market (increased vacancy, falling rents).
This example also provides insights into the likelihood of future potential Government interventions impacting the housing market and why the levers that Government decides to pull are so critical to how the rental crisis plays out and is ultimately resolved.
Charter Keck Cramer encourages all levels of Government to be proactive, brave and take an approach that stands to resolve the rental crisis by focussing on facilitating the supply of new dwellings. The BTS and BTR apartment markets need to be stimulated as soon as possible so that supply can start to be mobilised and brought to market. The additional supply will place downward pressure on prices and rents and assist in solving the rental crises over the longer term. Initiatives to facilitate supply include removing taxes and charges, fast tracking and streamlining planning, and allowing foreign and local investors back into the new housing market through incentives. This will take time, but this is the proper solution to fix this issue.
Charter Keck Cramer strongly encourages all levels of Government to avoid taking a reactionary response and seeking to apply short sighted and ill-informed interventions such as rental caps. Whilst this would provide rental relief in the short-term it will once again bluntly distort the rental market and delay it reaching a new market equilibrium. These interventions stand to prevent foreign and local investors from investing into BTR and BTS apartments which will stifle housing supply and over the long term further exacerbate the housing and rental crises in Australia. A further major concern if rental caps are introduced is an exodus of existing investors from the market. This could occur as private rental dwellings are divested and acquired by owner occupiers thus reducing overall rental stock.
Rental caps also stand to lock out many future age groups and households from ever owning a home because both renting and pricing will ultimately become even more expensive in the longer term given new supply will be stifled.
Charter Keck Cramer again reminds Government that decisions made today impact the property markets of tomorrow. Brave, educated and evidence-based decisions need to be made now to start resolving the rental crises.
Charter Keck Cramer highlights to BTR developers and investors as well as BTS developers and investors that the rental markets are currently not functioning as they historically have, and this creates both opportunities and risks that need to be considered and priced into your projects. There is evidently a strong justification to expect elevated rental growth across many sub-markets over the next 3 to 4 years, but this needs to be informed by well-researched decision making. There is also the very real possibility, and increasing likelihood, that Government interventions could continue to distort the rental markets further (either in a positive or negative way) and this too needs to be factored into your decision making.