Property

Rents are accelerating at their fastest pace in 2½ years and are likely to rise further, amid concerns the federal budget will do little to boost housing supply in the short term and may even add to the cost of renting.

Weekly asking rents across the capital cities rose an average 6.9 per cent from a year ago, SQM Research figures on Wednesday showed, with the combined figure for houses and units in Sydney up 7.1 per cent year-on-year, up 6.3 per cent in Melbourne and 8.7 per cent in Brisbane.

The yearly rate of gain is likely to go as high as 10 per cent over the next year – putting it above the 9.2 per cent chalked up in November 2023 – as the underlying shortfall of rental houses is exacerbated by last week’s federal budget, leading to a reduction in rental housing supply, said SQM managing director Louis Christopher.

“I’m seeing no change with building numbers or suggestions there will be equilibrium between supply and demand any time soon,” he said.

“Going forward with the property tax changes, we can expect a decline in available rental stock over the course of the next two years. Rental yields will need to rise to encourage investors back into the market and that will happen through a combination of housing price falls and rises in rents.”

The budget announcement that negative gearing and the 50 per cent discount on nominal capital gains will no longer be available to investors for existing homes – although they both remain available for investment in new builds – has stoked debate about the extent to which the tax breaks subsidise rents.

Investor advocates have said negative gearing – which allows a landlord to offset losses from a rental property against other forms of income, such as wages – keeps rents lower than they would otherwise be.

“Rents are a persistent inflation … That 7 per cent you have today is embedded in 6 months’ time. There’s almost nothing you can do about it.”

— Jo Masters, Barrenjoey chief economist

“Anything that eases their investor cash flow enables them to hold a property,” said Cate Bakos, a buyers’ agent and chair of industry body Property Investment Professionals of Australia.

“It’s a crude way of putting it, but it certainly subsidises rent. It alleviates their holding costs.”

That was seen during the COVID-19 pandemic when lower interest rates made it easier for landlords to accept rental reductions or freezes, Bakos said.

“It was far easier to say ‘yes’ because holding costs were less,” she said.

Independent economist Saul Eslake said, however, that rents were set more by vacancy rates and what the market would bear, rather than costs faced by landlords.

“Rental is not a cost-plus business,” he said. “That is, landlords charge what the market will bear, which is driven largely by vacancy rates.”

Rents did not fall last year when the Reserve Bank of Australia was cutting interest rates and they had not risen this year as a result of borrowing costs rising again or because council rates rose for landlords, he said.

Rather, negative gearing had allowed landlords to borrow more to push up prices, Eslake said.

“By incentivising landlords to borrow more money to bid up, forcing up the price of housing we’ve already got, they’ve inflated the price of housing,” he said.

“If negative gearing didn’t exist property prices wouldn’t be as high as they are and rents as a percentage of the cost of property wouldn’t be higher, either. Landlords wouldn’t need to raise rents as much to make a return on their asset.”

Higher rents do raise risks for inflation. Christopher said the near 7 per cent capital city annual rate of increase for rents was the highest since the post-pandemic period.

Barrenjoey chief economist Jo Masters said rents made up the second-largest line item in the official CPI basket – after the cost of building a new home – and that the trend of rising rents was a risk.

The CPI rental figure represents the so-called stock of all rents – that is, all rental prices, whether they are renewed or not – so it will be lower than the current rise in asking rents.

But Barrenjoey’s forecast this calendar year is for 3.9 per cent CPI rent inflation, which Masters said was “quite strong”.

“Rents are a persistent inflation,” she said. “That 7 per cent you have today is embedded in 6 months’ time. There’s almost nothing you can do about it.”

Bakos said when investors were pressured financially they would push to get the highest rent they could.

“We’ve seen it with land tax; we’ve seen it with increased interest rates,” she said.

Christopher said the post-pandemic acceleration of rents, which have jumped from a yearly growth rate of 2.5 per cent in May last year to 6.9 per cent now, would put pressure on headline inflation.

“Is it a return back to the days of 2021 and 2022? Not yet, but it’s clear the re-acceleration will feed into the Australian Bureau of Statistics’ CPI soon,” he said.

Sydney and Melbourne housing prices could fall by 5 per cent in 2025, driven lower by a glut of listings, unaffordable prices and high interest rates, the latest Housing Boom and Bust report by SQM Research predicts.

Property prices in Canberra and Hobart are also predicted to drop by up to 6 per cent and 3 per cent respectively.

Report author and SQM Research managing director Louis Christopher said the bulk of the forecast price falls would occur in the first half of next year before interest rate cuts, which are expected by the June quarter.

“Current interest rate settings are biting the community more in these cities which, on our measurements, are in overvalued territory and/or are experiencing slower economic growth compared to the cities and states that have enjoyed good economic growth,” he said.

“However, once interest rate cuts do occur, we are expecting a speedy bounce in demand for Sydney and Melbourne in particular, which both are still experiencing underlying housing shortage relative to the strong population growth rates.

“This may well mean there is a good window for buyers at this time for our two largest capital cities.”

Sydney home values started to weaken last month, albeit marginally, falling by 0.1 per cent, while Melbourne slipped by 0.2 per cent, separate CoreLogic data shows.

However, the pace of decline has increased over the four weeks that ended on November 24, with CoreLogic’s daily index showing prices falling by 0.2 per cent and 0.3 per cent in the markets respectively.

The two leading indicators for housing prices – auction clearance rates and the amount of stock on market – suggested price drops in those cities would persist, Mr Christopher said.

Clearance rates have slumped to the low 40 per cent range across Sydney, which historically has indicated housing price falls of a moderate to potentially heavy extent, according to SQM’s data. Melbourne’s clearance rates have fallen to around 45 per cent, signalling an ongoing downturn.

At the same time, stock on the market has piled up. Stock levels are running higher than the start of the downturn of 2018 to 2019 – a period where Sydney housing prices fell by about 12 per cent from peak to trough.

‘Ripe for a correction’

Similarly, in Melbourne, total listings have blown out to about 42,000 dwellings – 5000 above the long-term average, and a level that has created housing price falls in the past, SQM’s analysis shows.

“The Sydney housing market is ripe for a correction. Our leading indicators tell us it’s happening, and our fair valuation models tell us it should be happening,” Mr Christopher said.

“Melbourne currently has a surplus of properties and the situation has deteriorated over the course of 2024, indicating an ongoing weakness in the market.

“But we’re not expecting a house price crash because there’s still a considerable shortage of homes in those cities compared to underlying demand for accommodation.”

By contrast, house prices in Perth, Brisbane, Adelaide and Darwin are expected to pick up steam.

Perth prices are forecast to rise by up to 19 per cent, the sharpest increase of all capital cities, followed by Brisbane with 14 per cent growth, Adelaide with 13 per cent rise and Darwin with 8 per cent gain.

While still the largest gains in the country, they are slower than the increases notched up so far this year. As at the end of October, Perth dwelling values had increased by 24 per cent, Brisbane was up by 14.5 per cent and Adelaide by 14.8 per cent according to CoreLogic.

“We’re seeing nothing in those markets that suggests an imminent price decline,” Mr Christopher said.

“Stock levels are extremely tight, demand is very strong due to ongoing population growth and their economies are doing well.”

Interest rate factors

Mr Christopher’s base case prediction – one of the four potential scenarios – assumes interest rates fall by 0.5 per cent by mid-next year.

The forecast is also based on the assumptions that population growth is at least 500,000 over 2025, and that there are no new spikes in inflation that would trigger a rate rise or would prompt the RBA to hold off easing.

In a second scenario where there is no rate cut, but no surge in inflation, and with population still increasing by 500,000 or more, house prices in Sydney and Canberra would tumble by 8 per cent, Melbourne by 7 per cent, and Hobart by 5 per cent.

It will reduce Perth’s price gains to 11 per cent, Brisbane 9 per cent, Adelaide by 8 per cent and Darwin by 7 per cent.

Paul Bloxham, HSBC’s chief economist said the risk of the Reserve Bank not cutting interest rates has increased.

“On a core basis, the economy is still operating at, probably still a bit beyond its full capacity, and the very slow decline in inflation means the RBA really can’t consider cutting interest rates anytime soon,” he said.

“The job market is still at, or slightly beyond full employment and does not appear to be loosening further at this stage.

“If it turns out the job market is not loosening further, then rate cuts may not happen at all. At the moment, we think there is a 25 per cent chance that interest rates don’t get cut at all in 2025.”

Oxford Economics senior economist Maree Kilroy said while interest rate cuts could be delayed until June next year, they would be deeper than what the market was predicting.

“We’re expecting the RBA to slash the cash rate by a total of 1.25 percentage points to bring it back to neutral settings,” she said.

“This will improve mortgage affordability and help price growth in the following year.”

House prices are now falling across two out of every five Sydney suburbs, a five-fold increase from a year ago, and the highest level in 20 months, data from CoreLogic shows.

The share of Melbourne suburbs where house values dropped in the past three months also blew out to 76.3 per cent, six times higher than last year.

Tim Lawless, CoreLogic’s research director, said the downturn was becoming more widespread as stock levels rose, borrowing capacity shrank and affordability worsened.

“We’re now seeing a fairly broad-based, but so far, mild downturn,” he said. “Sydney is still in the early phase of the downswing, so we’ll probably see more suburbs where house prices drop in the coming months.”

Sydney home values fell by 0.1 per cent last month, the first monthly decline in almost two years, while Melbourne dipped by 0.2 per cent as the housing outlook dimmed.

The number of Sydney suburbs where house prices fell over the past three months to October jumped to 225, up from just 46 last year.

Similarly in Melbourne, values have dropped across 290 suburbs, a sharp rise from only 48 a year ago.

Louis Christopher, SQM Research managing director, said house prices in both cities were on track to fall further in the coming months.

“Auction clearance rates are now falling in Sydney, well beyond the seasonal weakness, and we’re seeing a marked increase in distressed selling across Melbourne,” he said.

“There are now 1117 total distressed listings in Melbourne as of November 6, which is the highest level since we started tracking in 2020.

“In the past year distressed selling surged by 28.4 per cent, which tells me there are more property owners that are struggling financially, as confirmed by the rising default rates,” Mr Christopher said.

Moody’s Ratings analysis showed mortgage delinquency rates increased across the country over the year to May. Melbourne emerged as the epicentre of arrears. The portion of mortgage defaults across the city increased by 0.73 of a percentage point to 2.54 per cent, just behind Hobart, which posted a 1.3 percentage point rise in arrears to 2.68 per cent.

Melbourne dominated the top 20 suburbs with the highest mortgage default rates. Fourteen suburbs posted delinquency rates as high as 5.37 per cent. By contrast, many suburbs with the lowest default rates were in Brisbane and Sydney.

However, there are signs that worsening affordability has started to weigh across Brisbane, as house prices dropped in 36 suburbs out of 326, an eightfold rise from just four suburbs last year.

House values lower

Nationally, house values for about one out of three suburbs have drifted lower, which is more than double from a year ago.

By contrast, the number of Adelaide suburbs where house values fell over the past three months shrank by about half, while prices in all Perth suburbs rose during the same period.

The surge in listings across the biggest capitals has significantly outpaced demand, which has weighed on prices.

Total listings climbed by 7.1 per cent across Sydney over the past four weeks to November 3 compared to a year ago and lifted by 4.2 per cent and 4.9 per cent in Melbourne and Brisbane, respectively.

Total listings are now 13.2 per cent above the previous five-year average in Sydney and 13 per cent higher in Melbourne.

“Values are still falling in Melbourne because of a big increase in listings by disgruntled investors selling up in Victoria,” said Scott Kuru, co-founder of property investment advisory Freedom Property Investors.

“Nevertheless, this is a great time to buy in Melbourne. Melbourne property is seriously undervalued at the moment, especially when you look at population inflows – from overseas and other states – to what’s arguably now Australia’s largest city.

“Buying conditions probably aren’t going to get much better in Melbourne, but if you see a great investment grade property in Brisbane or Sydney I wouldn’t hang around on the off chance prices might decline,” he said.

Sydney downturn ‘accelerating’

The upper end of the housing market posted the sharpest decline of up to $326,000 in just three months as demand wanes amid higher borrowing costs and property prices.

House prices in Rodd Point in Sydney’s inner west, along with Abbotsford and Balmain East slumped by at least 7 per cent or the equivalent declines of between $221,797 and $325,846 during the same period. Those suburbs have also dropped by 8.2 per cent, 7.6 per cent and 2.1 per cent in the past 12 months respectively.

“The downturn in the top 25 per cent of the housing market, particularly in Sydney is clearly gaining some momentum,” Mr Lawless said.

“House values in this segment had been falling since June last year and in the past two months alone, they declined by 1.1 per cent, which is nearly twice as fast compared to the previous two months.

“So, it doesn’t look like this trend is turning around. It seems like it’s actually accelerating,” he said.

Across Melbourne, house values in inner suburbs Albert Park, South Melbourne and Port Melbourne tumbled by 9 per cent, 8.6 per cent and 8 per cent respectively, equating to a loss of between $132,882 and $213,677 in the past three months.

In Brisbane, Teneriffe led the largest drops in house values, at 4.8 per cent or a decline of $100,571 in the median.

House prices in suburbs within Adelaide’s Central and Hills district also weakened, with Hazelwood Park, Rosslyn Park and Kensington Garden posting 3 per cent, 2.6 per cent and 1.8 per cent respectively.