“Subdued” rental growth on the cards if international borders not open by 2021: RBA

Inner-city housing rents are tipped to show “subdued” growth in the years ahead if the reopening of international borders is delayed beyond 2021, according to the Reserve Bank of Australia (RBA).

Rents in inner Melbourne and Sydney have seen the biggest falls. Melbourne CBD rents plunged by 13 per cent in the three months to July, while in Sydney’s eastern suburbs, Manly and Leichhardt areas, rents tumbled by more than 10 per cent, an RBA report found.

“These areas were more adversely affected by declining demand from fewer international students and the conversion of short-term accommodation to the long-term rental market,” the report noted.

Falling demand and increased supply in some areas

Demand for rental properties have dropped due to a weak job market, as families cut back on spending and request rent reductions or deferrals, according to the RBA.

In general, those who are more likely to live pay cheque to pay cheque tend to be:

• younger,
• more likely to work in industries that saw the most initial job losses, including hospitality and arts & recreation, and
• twice as likely to rent.

“In the near term, renters with limited savings and who are experiencing job insecurity are likely to reduce their spending on housing,” the report noted.

On top of this, a significant part of the rental market has almost evaporated, with international student and migrant numbers nosediving due to the closure of international borders. 

And as international and domestic tourism dwindle, many short-term accommodation providers have listed their properties on the long-term rental market, which is seeing supply levels shoot up. About 40,000 short-term rental listings were axed from Airbnb between February and May, a plunge of about 20 per cent, according to AirDNA data cited by RBA.

Additionally, new property developments which are set to be completed in the next year or two are anticipated to increase the long-term rental stock.

“A large share of these are high-rise apartments that commenced construction a number of years ago when conditions in the established housing market were much stronger,” the report wrote.

However, the RBA noted that this increase in supply has not been the same across all locations and housing types, and is likely to be sharper with apartments in the inner areas of Melbourne and Sydney.

When will the rental market recover?

The central bank predicts that rents in inner-city areas “will remain lower than expected pre-pandemic”, thanks to lower population growth and apartments in the pipeline being delivered in inner Sydney and Melbourne.

By 2021, the national vacancy rate could nudge up by about 1 percentage point, the RBA predicted, before an adjustment in supply and reopening of international borders brings demand back up.

Australia’s population is forecast to see a 1.5 per cent drop by June 2021, or 400,000 fewer residents, from what was projected before the pandemic, according to Treasury figures cited in the report. This decline in population growth is expected to push rents down by about 3 per cent nationally from pre-pandemic expectations over the next few years.

However, depending on how well COVID-19 is controlled, demand for rental properties and rents may bounce back next year.

“The eventual reopening of the borders to international migration will lift demand for rental properties while reduced construction activity will translate into lower-than-otherwise growth in the supply of new dwellings,” the report wrote.

If the coronavirus is controlled and international borders reopen next year, rental demand in inner Sydney and Melbourne could rise, which would prop up rental values.

And with about one in 10 investors pausing their mortgage repayments due to the impact of COVID-19, which is slightly less than the proportion seen with owner-occupiers, it seems “most investors do not appear stretched” despite the fall in rents, the RBA suggested.

Government measures have helped cushion the blow for the rental market: RBA

Along with Jobkeeper and Jobseeker, the temporary ban on evictions for tenants financially impacted by COVID-19 has “helped offset the acute fall in rental demand and stabilise the rental market”, according to the report.

While there was a noticeable drop in online searches for rental properties in late March, government measures and advertised rent cuts helped bring interest and bond lodgements back up from April.

“This suggests that a tenant-favourable market is enabling renters with the capacity to do so to move into properties with lower rents or better amenities,” the report wrote.

For existing leases, the moratorium on evictions and the requirement for landlords and tenants to negotiate in “good faith” supported the rental market through rent payment relief, including discounts and deferrals.

Nearly 15 per cent of existing tenants have accessed some form of rent relief since the end of March, according to data from property management platform MRI, cited by the RBA.

“Discounting and deferral activity increased sharply in the last week of March – coinciding with the announcement of the six-month moratorium on evictions – and peaked in April,” the report wrote, adding that the rate of new discounts and deferrals has slowed since May.

The RBA also pointed out that government policies have prodded tenants and landlords to consider their existing lease terms and potentially renegotiate.

While the ban on evictions is set to end in Queensland on September 30, Victoria, which has been heavily affected by recent COVID-19 lockdowns, is seeking to extend the moratorium and freeze on rent increased until March 28.

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