The rent divergence in the big 3 capitals

According to Eliza Owen, CoreLogic’s head of research, the fall is partly attributable to a relatively high supply of unit stock in recent years, with unit completions across NSW peaking at 11,566 in the December 2018 quarter, against a 10-year average of 6,315 completions.

Further, factors affecting demand also pushed down unit rents in the NSW capital, along with its Victorian counterpart.

In Melbourne, where most of the impact was felt, unit rents decreased by -7.0 per cent, while house rents increased by a mild 0.6 per cent.

“Through COVID-19, the closure of international borders was a shock to rental demand for Sydney and Melbourne, where around two-thirds of net overseas migration to Australia has been concentrated for the past three years. This is because the vast majority of recent overseas arrivals are renters.”

“Sydney and Melbourne labour markets also had a relatively high portion of workers in hospitality, tourism and the arts, which have been subject to acute job loss through the pandemic, and are sectors where workers are more likely to rent than in other industries,” Ms Owen explained further.

The median rent value for Sydney units fell to $480 per week, down from $500 in November 2019, and down from a pre-COVID high of $520. However, the monthly decline in Sydney unit rent values has eased to -0.8 per cent in November, since bottoming out at - 1.1 per cent through June.

Meanwhile, median unit rents in Melbourne have fallen to $400 per week, down from $430 in November 2019 and a pre-COVID high of $450.

As with Sydney, the decline in Melbourne unit rents was driven by stalled overseas migration, and acute job loss across sectors where workers have a higher likelihood of renting, according to Ms Owen.

However, she said: “Unlike Sydney, Melbourne rental demand was compounded by a second wave of restrictions through the September quarter, and an abnormally high next loss of people from Melbourne to other parts of Australia through the June quarter.”

The monthly decline in Melbourne unit rents has already eased, from -1.3 per cent in August to -1.1 per cent in the month of November, as employment conditions gradually improve across accommodation, food, arts and recreational service industries.

“Rental demand will be further boosted across Sydney and Melbourne when international travel is once again feasible, though this may not be for some time,” Ms Owen noted.

Like Sydney and Melbourne, Brisbane also saw rent divergence between houses and units, though not as extreme as the divergence seen across the bigger capital cities.

While Brisbane house rents increased by 2.2 per cent, unit rents decreased -1.3 per cent.

According to Ms Owen: “Across the three cities, part of the difference between house and unit performance may not be about renters preferring houses over units during COVID-19, but rather location and stock availability.”

Areas further from the CBD of Sydney, Melbourne and Brisbane, where rental stock is less concentrated and are more likely to be houses than units, have been more likely to see rental value increases, she said.

Looking forward, Ms Owen expects COVID-19 to have a lasting impact in terms of varied dynamics between cities and property types.

“For weaker rental markets such as Sydney, Melbourne and Hobart, rents are likely to remain weak until international travel resumes.

“Meanwhile, other capital cities, especially those with rapidly rising rents like Perth and Darwin, could see the gradual re-entry of property investors, which would lift rental supply and support an easing in rental value growth over time,” she concluded.

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