City rents could drop for years before bouncing back

Renters living in the nation’s largest capitals are likely to pay less rent in the coming years, according to a government agency, as thousands of units in the city centres are expected to sit empty gathering dust.

The conditions are likely to free up funds for renters and help them move towards city centres, but the shortfall is expected to squeeze investors -- particularly those heavily in debt.

When supply outweighs demand

A population shortfall and throttled overseas visitors could lead to apartments outnumbering renters in Sydney and Melbourne, the National Housing Finance and Investment Corporation (NHFIC) said, in its first major report forecasting the next five years in housing.

“Housing demand is projected to fall over this year and next due to the dramatic impact of COVID-19 on net overseas migration,” Nathan Dal Bon said, chief executive of NHFIC.

“This in turn is projected to result in new housing supply temporarily exceeding new demand.”

But the relief of renters and strain of investors are also forecast to be short lived, provided pandemic health restrictions can be eased and health restrictions are dropped.

By 2023 to 2025, NHFIC estimates there will be more people vying for fewer rental homes.

“Any cumulative excess supply could be negligible if effective vaccines are available earlier and international borders reopen sooner than expected,” Mr Dal Bon said.

A million less people not needing a new roof

About a million fewer people than previously forecast due are expected to be living in Australia within the next five years, NHFIC said, in large part to the COVID-19 pandemic.

This is expected to lead to 286,000 fewer people needing a property between 2020 and 2025, when compared to the forecasts developed before the pandemic.

“With new supply expected to exceed new demand over the near term, it is likely to put downward pressure on rents in Sydney and Melbourne where vacancy rates are higher,” the NHFIC report said.

“This could improve overall rental affordability, although the real impact will differ across geographies and household income distributions.”

Apartments in city centres will likely be impacted the most, which tend to be favoured by international students and overseas migrants.

Then by 2023, on the back of a strengthening economy and the anticipated opening up of international borders, rents are expected to rise, as the number of people looking to sign a lease outweighs the number of homes listed on the market.

But by then, due to the pandemic and the circumstances surrounding it, fewer homes will be in the development pipeline, leading to demand outpacing supply.

NHFIC expects about 148,000 houses, townhouses and units will be developed and put onto the rental market by 2025.

There’s a key variable that could influence the accuracy of these forecasts, NHFIC said. And that’s if a vaccine is developed and implemented earlier than expected, leading to the reopening of international borders sooner.

The state of the market today

Sydney and Melbourne are already experiencing falling rents and elevated vacancy rates, although most other capital cities remain stable.

Rents fell across the two city capitals for houses and apartments over the year to December, according to SQM Research, pushing the national average down.

The only other city to experience falling rents was Hobart -- but just for units.

Renting a unit in Sydney cost 9.6 per cent less than it did a year earlier, the research firm said, with the average apartment costing $447 in the week ending 12 December. House rents were down 6.7 per cent to $638.

A similar story is unfolding in Melbourne, where units fell 6.7 per cent to $383, and houses dropped 4.1 per cent to $512.

SQM Research Weekly Rents Index

The falling property prices correlate to the rise in properties sitting vacant across the city centres.

The national vacancy rate sits at 2.1 per cent as of November, SQM Research said.

But about 9.1 per cent of properties are vacant in Melbourne’s CBD, while 9.5 per cent gather dust in Sydney’s CBD.

"Rents for units in our two largest cities are still falling, though … there appears to be a commencement of a reversal in the abundance of listings in the CBD’s of these two cities,” Louis Christopher said, managing director of SQM research.

“They are still very elevated, but we could be starting to see some of the population moving back to the CBD and inner city locations.”

Compare home loans in Australia