Rental growth flat in December quarter, but APM says shortage still pushing up prices

Rental price growth came to a halt during the December quarter as the property market began to feel the effects of higher interest rates, according to new figures published by Australian Property Monitors.

But economist Andrew Wilson says despite the subdued prices, vacancy rates are still below 2% in many areas and rents will begin to rebound in the second quarter of 2011 due to higher demand.

“The fundamentals in the market are that there is still not enough supply, there are accommodation shortages… but that doesn’t necessarily mean there will be ongoing pressure in rental increases right now.”

The figures show that rental price growth came to just 1% for houses in the December quarter, while rental prices for units actually fell by 0.2%. Sydney, Canberra and Darwin have been listed as the most expensive capital cities, with Canberra the standout at annual growth of 4.5% for houses and 5% for units.

Hobart recorded the highest amount of growth for the quarter, with rents rising 3.2% to a median price of $320, while Brisbane came in second with a 2.8% increase to $370.

Canberra recorded an increase of 2.2% to $460, while Melbourne and Perth both recorded increases of 1.4% to $365 and $375 respectively. Sydney, Adelaide and Darwin all remained flat.

The result was similar for units. Sydney, Perth, Hobart and Darwin all recorded 0% growth during the quarter, with Brisbane recording the highest growth at 2.9% to $350. Canberra rose by 2.4% to $5,420, while Adelaide prices rose 1.9% to $270.

Melbourne unit rental prices actually fell by 1.4% to $340.

The result comes alongside similar results in the home buyers’ market, where prices are falling due to an oversupply of stock and rising interest rates.

But given so many economists and housing experts say a lack of stock is actually pushing up prices, why are the most recent results so subdued? Wilson says the explanation is that a lack of stock doesn’t necessarily translate to higher rents – at least, not yet.

“What we’re seeing now is a market that is underpinned by the current sentiment, rather than a reflection of fundamentals. And the fundamentals are that there is not enough supply, there are accommodation shortages and vacancy rates are below 2% in many areas.”

The Housing Industry Association says there will be a shortage of over 20,000 homes this year. But Wilson says the issue is that landlords haven’t yet put the pressure on tenants due to lower consumer confidence and rising interest rates.

“Landlords are being more circumspect, because confidence can be a two-way street with buyers and sellers. Perhaps there is movement to consolidate rental outcomes, rather than push for higher rentals. This could be a flattening before the growth resumes.”

“What we’re seeing is that landlords will start having more confidence to push up rents when the economy improves. I think that’s what the issue boils down to, and again, I believe it to be a short-term problem.”

Despite the subdued growth in prices, yields have actually performed quite well. For houses, Hobart recorded a 4.7% increase to 5.13%, with Canberra recording a 2.1% increase to 4.76%, along with Darwin and Sydney both rising by 1.9% to 4.53% and 4.38% respectively.

The only city to record a fall was Melbourne, at 1.4% to 3.52%.

For units, Canberra yields increased by 2.6% to 5.48%, Sydney by 2% to 4.95%, Hobart by 1.5% to 5.15%, Adelaide by 1.4% to 4.71%, Brisbane by 1.3% to 4.76% and Perth by 1% to 4.79%. Only Melbourne and Darwin recorded falls of 1.6% and 1.1%, to 4.17% and 5.08% respectively.

Wilson says these strong results will keep investors in the market as the year goes on, particularly as prices reach their bottom.

“Investors have been out of the market for awhile now, and the finance figures show that the amount of investors taking up loans is down. I think what they are looking for is the bottom of the cycle, and I think that will become evident in March and April.

“Of course, the effects of the floods will have damage on sentiment, and discretionary buyers will be put off for a while. But I do think investors are going to start moving in, and once we see higher confidence and the opportunity for capital gains, we’ll see price appreciation and the ability to increase rents.”