2023 will be the year of strong rental returns, report says

According to the global real estate agency, a combination of factors has resulted in a supply crunch that will help drive rent prices upward in the coming year. 

The report first noted that the sustained population growth across the country, which has risen by 4.6 per cent over the past five years, has continued to add to demand and has been augmented by a gradual rise in the proportion of households renting.

It also pointed towards a 17.8 per cent decline in new dwelling construction over the same period. The report highlighted that following the high completion figures of 2017–18, the market saw “much lower levels” in completed properties. 

Further adding pressure to supply is an observed trend of investors divesting their rental properties to take advantage of the strong property increases over the pandemic as well as severe weather events taking homes offline and removed from rental pools across the country.

Knight Frank cited the trend in vacancy rates over the last five years as proof that the supply crunch has particularly impacted the rental markets.

“Over the past five years, vacancy has averaged 2.7 per cent in Australia capital cities and 1.7 per cent throughout regional Australia,” it explained. 

“By mid-2022, however, vacancy had contracted to a very lean 2.1 per cent in capital cities, and 1.2 per cent in the regions. This is the lowest vacancy rate for capital cities since 2010, whilst regional Australia saw only a modest rise from the 0.9 record low in March 2021.”

The global real estate agency also noted that the tightening in rental markets will coincide with a further easing in prices of residential properties. 

Following years of strong capital growth thanks to “substantial government stimulus, rapidly increasing household savings and historically low interest rates”, the report stated that the market is now heading towards a correction. 

“Since the pandemic, Australian residential values have grown by 20 per cent. Although since March 2022 values have fallen by 4.6 per cent as the cash rate has shifted substantially to higher to tackle elevated inflation, providing a catalyst for the market to eastwards a more sustainable level of annual growth over the coming years,” it said. 

Although the report predicted that capital growth will continue easing as the Reserve Bank resumes its cash rate cycle in 2024 following eight consecutive rate rises that saw rates clock in at 3.1 per cent at the end of November, it also estimated that every capital city will be “back on track with a positive capital growth trajectory” once the RBA begins to cut rates next year. 

Whilst the focus has come off capital value growth, Knight Frank pointed out that sustained rental growth has allowed for more attractive gross yields to emerge, moving up 11 bps to 3.71 per cent in the past two quarters. 

Off the back of strong rental growth, the gross rental yield of Sydney residential homes rose the most of all cities over this period, up by 29 bps now to trend in the upper range of 3 per cent. 

While it will be a happy new year for some in the housing market — particularly for landlords — the report noted that tenants who are already struggling to find a place and are finding rental prices a heavy hip pocket pain will continue to do it tough, if not tougher, in the coming year. 

Knight Frank stated that the “supply shortage will be difficult to resolve, and rental displacement is likely to intensify over the coming years as Australia once more welcomes permanent migration, with over 90 per cent of the 195,000 places going to skilled migrants”.

But the report offered a light at the end of the tunnel, predicting that the trend of higher yields will continue in 2023 and consequently “help restore investor demand and over time, boost the currently subdued development pipeline.”