2022: prepare for a year of rising rent prices

Rent rises invariably lag behind house price jumps, but in ­recent weeks evidence is mounting that landlords are now pushing up prices.

Rapidly rising rental costs following this year’s 20 per cent lift in house prices will hit hard next year, stoking inflation, squeezing ­affordability and even – according to the University of Sydney – forcing renters to delay having children.

Rent rises invariably lag behind house price jumps, but in ­recent weeks evidence is mounting that landlords are now pushing up prices. Property research group SQM reports rents for stand-alone houses are rising at a dramatic 12 per cent a year – more than three times the pace of ­inflation.

As economists assess the effect of higher rents on house affordability and overall inflation, the University of Sydney report says new academic work suggests rent increases will also directly affect the birthrate.

According to Associate Professor Stephen Whelan: “Housing constitutes a major cost of raising a child so, as the cost of housing increases, having children in Australia has become more expensive … Renters, who are generally less financially secure than homeowners, may choose to delay having children in the face of rapidly rising house prices.”

The University of Sydney report coincides with an unprecedented lift in rent prices across the nation’s capital cities, where the residential rental property ­vacancy rate – the amount of available rental space currently unoccupied – is at just 1.5 per cent.

Apart from forcing some couples to put off having kids (a trend already established in the US and the UK), the nation’s rising rents may also affect investor demand, with rent rises attracting new ­income-seeking investors.

In contrast to the traditional picture where vacancy rates were often tightest in the bigger cities, the vacancy rates are currently at their most severe in Hobart (at 0.3 per cent), Adelaide (0.5 per cent) and Perth (0.6 per cent).

Across the nation, rents are rising fastest for houses in Brisbane, at 16 per cent over the year, while for apartments the biggest jump was in Darwin, also at 16 per cent. The national average move was 14 per cent for houses and 9 per cent for apartments. (The modest growth in apartment rentals reflects the slower growth in apartment prices over the year.)

Even inside the major cities, where there has been a boom in accommodation construction, the amount of available rental stock is dwindling. In Melbourne, it is down from 4.4 per cent this time last year to 3.2 per cent; in Sydney, it has dropped from 3.5 per cent to 2.6 per cent.

SQM’s Louis Christopher, one of the first analysts to take note of the rental changes, told investors this month: “There has not been a time when five of our eight capital cities simultaneously recorded rental vacancy rates under 1 per cent.”

On the inflation front, up to a quarter of the consumer price index is made up of housing costs, including rental costs.

Investors have waited for years to see rental yields lift. In cities, yields are often 2-4 per cent, rising to 4-6 per cent in smaller towns and regional centres. (The rental yield is calculated by expressing the rental income as a percentage of the cost. For example, if a rented house brought in $50,000 a year in rent and cost $1m, it would have a rental yield of 5 per cent.)

However, rental yields will invariably lift when house prices stage a dramatic jump. The estimated 20.5 per cent-plus increase recorded in capital city home values over the past year is the strongest since 1989.

Average rents in Sydney are around $734 a week, with apartments at $475. In contrast, Adelaide houses rent for $465 a week and apartments for $336.

House prices are expected to soften in the second half of 2022, with many analysts expecting a return across the calendar year of 5 per cent – though predictions in this area are notoriously unreliable.