Australia's rental housing market approaches critical affordability threshold

Australia’s highly competitive rental housing market, fuelled by a surge in migration and a chronic lack of available housing, may be approaching a critical point in terms of affordability. As tenants grapple with the increasing cost of living, the country is experiencing historically low vacancy rates and a 30% surge in rental prices over the past three years.
The increasing cost of rent is currently a significant contributor to the country’s inflation, which stands at an annual rate of 5.4% in the September quarter, surpassing the central bank's target range of 2% to 3%. This situation could result in imminent interest rate hikes. Consequently, this would lead to higher variable rate mortgages for most Australian landlords, who are typically individual investors with one or a few properties, rather than large corporations. This, in turn, would put pressure on them to raise rents even further, leaving tenants facing difficult choices
Numerous renters, especially in the priciest city, Sydney, have already been unable to afford houses. According to PropTrack data, the national weekly house rental rates remained steady at A$550.
During the quarter, apartment rents saw a significant 4% increase nationwide, which is twice the rate of increase observed in the June quarter, bringing the average to A$520 per week, nearly on par with house rents.
Rental prices for the entire housing market in Australia surged by 7.6% in the third quarter compared to a year ago, marking the most substantial increase since 2009, and this trend mirrors the rises seen in the United States, where rental costs have also surged.
Reserve Bank of Australia Governor Michele Bullock anticipates that rent inflation will reach its peak at an annual rate of 10% in the next few quarters before beginning to ease. Real estate professionals are noting early indications of a slowdown in certain regions.
The supply side is also a problem. The housing supply is significantly falling behind due to challenges faced by the home construction industry, including high borrowing costs, a shortage of labour, and increased raw material prices.
Domain (DHG.AX), a property website, estimates that as many as 70,000 new rental properties are needed to restore balance to the market. Nationally, the percentage of income required to cover expenses for new rentals reached a historic high of 31.4% in the June quarter, as reported in the ANZ CoreLogic Housing Affordability Report released in September. For low-income households, this figure stood at 52% as of April, the most recent data available, at a time when wage increases are significantly trailing behind rising rental costs.

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Australia's rental housing market approaches critical affordability threshold

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