Rents have seen their fastest pace of growth since the 1950s – even longer, considering there were price and rent controls that artificially held prices lower than their market clearing rate in the 1950s. When rent controls were lifted, it allowed market prices to clear, resulting in both rent and dwelling prices snapping upwards sharply. No such thing has happened this time, though. it was simply a perfect storm of events that drove rents up. Over the past four years, capital city rents have increased by an almost unbelievable 52%, with an annualized rate of increase of 13.1% over the last three years.

While this has been great for investors, it has also been a nightmare for renters. A perfect series of policy mistakes by the government were to blame. The mixture of wartime immigration levels (around 300% the pace of the long-term average) saw more than 500,000 people enter the country combined with both too-low and then too-high interest rates, bankrupting many builders and killing the residential construction industry. The 30-35% increase in construction materials costs during the pandemic simply made the problem worse. Building approvals are now 18.9% lower than the decade average. It’s a giant demand push combined with an equally big supply squeeze.

On the one hand, there has been a massive spike in demand for rental properties due to higher levels of immigration, and on the other hand, we have seen a big drop in the supply of new dwellings. Having said this, the pace of rent increases is slowing despite the remaining shortages. Renters have simply run out of capacity to pay. This is clear enough looking at the charts.

While the pace of rent increases has slowed, they remain above zero, meaning they are increasing at a decreasing rate. In addition, average household sizes are creeping up, indicating that young people are staying at home longer and people are taking in roommates.

With rents taking up a greater proportion of income, households have cut back on retail spending, and retail trade volumes look like a deep recession. The unintended consequence of this is suppressed GDP numbers. Consumption (largely household spending) makes up 60% of our economy. Unsurprisingly, we are now entering our 6th consecutive quarter of a per capita recession. In addition to this, rent makes up 6% of the inflation calculation, so paradoxically, the higher inflation and interest rates we are experiencing are being buoyed by the shortage of rental accommodation…. Which was caused by high interest rates in the first place. It’s a baby doom loop.

If we drill down a little and look at the rental market by capital city, we can see a relatively high degree of alignment between the market timing. However, the magnitude varies quite a lot.

The strongest gains have been in Perth, at 12.7%, followed by Adelaide, at 8.2%. Sydney, Melbourne, and Brisbane are not far behind in the mid-to-high 7s.

A look at weekly asking rents shows that Melbourne has become the cheapest major capital city to rent in, which explains why the forecasted rent growth rate in Melbourne through 2025 remains one of the highest behind Perth (which started from a low base).

Despite the high demand and low supply remaining unaddressed, the pace of rent increase over the last few years has been unsustainable. With tenants beginning to hit their limits, we will see the rent growth fall to around 5-6% over the next 12 months before returning to their long-term average of 3% in 2026.

One of the best indicators of a market bottom in property prices is a local peak in rental yields. Yields have already peaked in several markets, and along with other cycle timing indicators, it is very clear now that the bottom in property prices is already in. As I mentioned, we are already in the middle stages of a bull run in the property market despite what it may feel like.