Two-tier rental market emerges as inner Sydney and Melbourne rental stock shoots up

Rental listings have shot up in inner city pockets of Sydney and Melbourne since COVID-19, despite Australia’s broader rental market beginning to tighten, new CoreLogic research showed. 

Total listings on the national rental market fell by 10.9 per cent in the 28 days to August 9, according to the research firm.

But the opposite is happening in some inner city employment centres with 100,000 to 500,000 people, known by the Australian Bureau of Statistics (ABS) as statistical area 4 (SA4) regions.

Which rental markets have had increased listings?

Ten of the 88 SA4 regions analysed had more properties listed on the rental market when comparing the 28 days to March 15 with the 28 days to August 9. The number of listings dropped in the remaining 78 regions.

Eight of the 10 SA4 regions which had an increase in listings were in Sydney and Melbourne, while the other two were in Brisbane and Adelaide.

Inner Melbourne saw the greatest jump in total rental listings, ballooning by 52 per cent to 10,764 between mid-March and early August. The median weekly asking rent in inner Melbourne declined by 9.6 per cent to $500 in July.

The second most affected SA4 region was Sydney’s city and inner south region, which surged by 48 per cent to 5,474 listings since mid-March. Landlords in this area have had to adjust their rental expectations, with the median asking rent plummeting by 10.5 per cent to $654 a week in July.

Rental stock in Sydney’s city and inner south region increased by a third to 2,985 listings in the same period. The median listed rent dropped by 10 per cent, or $81, to $731 per week.

Source: CoreLogic.

The 10 regions that have seen a spike in listings represent about 27 per cent of Australia’s total rental market, according to CoreLogic.

When looking at SA2 regions, or medium-sized areas with between 3,000 and 25,000 people, it was again areas in greater Sydney and Melbourne which saw the biggest jumps in rental stock between mid-March and early August.

Melbourne’s Southbank and city, as well as Sydney’s Haymarket and The Rocks, all saw surges in rental listings of more than 100 per cent in the same period. 

In Southbank, rental stock swelled by 116 per cent – from 568 listings in mid-March to 1,230 by August 9. Yet the inner Melbourne suburb had an average of 450 listings per month in the 12 months leading up to the beginning of COVID-19.

According to SQM Research, Sydney is the capital city with the highest vacancy rate in Australia, with 3.6 per cent of rental properties empty in July, down by 0.2 per cent since the month prior. Its CBD, however, has a vacancy rate of 13.2 per cent, easing by 0.6 per cent since June.

Hobart has the tightest rental market among the capitals, at 0.7 per cent, which dropped by 0.2 per cent since June. 

Why demand for inner Sydney and Melbourne rental markets is falling

Eliza Owen, CoreLogic’s Australian head of research, said the bounce in rental stock was unusual for this time of the year.

“It is expected seasonally that most areas would see a decline in rental listings, as rental stock on market is usually highest at the beginning and end of each year,” she said.

“For the four years prior to 2020, rental stock on market at mid-August has on average, been -3.2% lower than what is seen over mid-March.”

Ms Owen said the findings showed how rental markets have been impacted differently post COVID-19.

“The dominance of Sydney and Melbourne with regards to heightened rental supply highlights the much localised nature of the shock to rental demand that has been seen since the onset of the pandemic,” she said.

One of the factors contributing to the fall in housing demand is international border closures.

“This is because the majority of new migrants to Australia are renters, at least initially,” she said.

Increased high-rise property development activity has added to the supply pipeline in some inner city areas, which has also contributed to a jump in rental listings during the economic downturn.

Louis Christopher, chief executive officer of SQM Research, added that people have been relocating away from densely populated inner city pockets to regional areas due to COVID-19.

“This very likely has been as a result of fears surrounding coronavirus and the ability for many employees (particularly in the corporate sector) to work remotely,” he said.

What property investors should note when rental stock is rising

Some inner city rental markets may appear dire when looking at the short-term numbers, but this doesn’t necessarily mean investors should take drastic action about their property portfolios. 

If you’re a property investor who’s playing the long game and is able to hold your property long-term, you may have little reason to panic. This is particularly the case for investors with healthy loan-to-value ratios (LVR) and stable incomes. Consider consulting a financial adviser for professional advice if you’re concerned about your situation.

Given the escalating home loan rate wars, it might also pay to look around and see if there are better mortgage rate deals to snap up.

For example, Homestar Finance recently slashed its variable interest rate for investors to as low as 2.49 per cent (2.52 per cent comparison rate) for those paying principal and interest on a mortgage with 70 per cent LVR. 

Variable rates generally allow you to benefit from lower repayments if the interest rate falls, but it does also mean your mortgage repayments could increase if the rate hikes. Variable rate home loans often have more flexible features, including the ability to make extra repayments or providing an offset account. 

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