This boom really is one for the ages. Now rents are lifting.
First prices. Then rents. Then prices again.
That’s how this boom is playing out.
We all know about the serious heat that record low interest rates have created. That’s always the way. Interest rate cuts boost spending power. That increase in spending power translates into rising prices.
But there’s something else.
Remember rising prices don’t cause rents to rise. Just because prices are going up, doesn’t mean you can charge tenants any more. It’s a competitive rental market.
So there’s no reason to expect rents to go up in a boom.
However, the causality does run the other way. When rents are rising, that’s increasing the gross return on your property, and like any asset class, the return an asset offers influences its price.
The greater the return, the more people are willing to pay for it.
And right now, that’s what we’ve got. Rents are rising at the fastest pace in a decade.
CoreLogic has released its April Housing Update, and it shows that rental growth nationally has hit its highest level since September 2011, growing by 3.9% in the year to April 2021:
This growth is being led by Australia’s regional markets, which experienced a whomping 8.6% rental growth in the year to March 2021, more than double the 3.9% rental growth experienced across the combined capital cities.
Every regional market bar the Northern Territory is experiencing strong rental growth, with regional Western Australia (10.7%) the hottest:
By contrast, rental growth across the combined capitals remains mixed, with annual rent falls recorded across Melbourne (-3.0%) and Sydney (-0.2%) (largely on the back of the high-rise apartment sector), offset by massive growth across Darwin (16.5%) and Perth (14.2%), with the other capitals in between.
The next chart, which plots the time series across Australia’s capital cities and across houses and units, shows the wild variation more clearly:
As shown above, units across Melbourne (-8.2%) and Sydney (-4.9%) have experienced heavy rental falls, whereas growth is positive in every other market; albeit softer overall for units than detached houses.
All this is why the regional property markets continue to outperform in terms of capital growth as well. While the capitals were growing at 4.8% in the year to March, the regions were growing by a massive 11.4%.
I don’t think I remember the differential ever being that big.
But this is what we’ve got. Interest rates sparked a boom in prices.
But household incomes held up, largely on the back of government support programs, and now our rental markets are booming as well.
Before you know it, that puts added heat into an already hot market.
And bam – super boom.
One for the ages.