Here are two 2022 data points you don’t often witness in property markets… Australian property values fell 5.3% on average during the year while average rentals increased 14.6%. It doesn’t stop there. Both these trends are continuing into the first quarter of 2023, and most forecasters expect them to continue for at least another few months. So the question many investors are asking right now is: how long can property prices fall while rentals are on the rise?
Why are property prices and rents diverging?
The two markets have fundamentally different short term market drivers. Property prices are largely driven by interest rates and the ease of securing a home loan, while the cost of renting depends on the availability of rentals compared to demand.
In the property market, rising interest rates and caps on borrowing capacity have pushed prices down in recent months. In other words, this is a funding constrained market slowdown. In contrast, rentals are rising all around the country because the rental vacancy rate has plummeted to record lows. There are many reasons for this. In addition to increased population growth due to resuming immigration levels, one of key the reasons renters are finding it difficult to purchase a home in today’s environment is the challenge of obtaining financing. This factor has also contributed to the decline in property prices.
First-time homebuyers are finding it increasingly difficult to enter the market due to the tightening of borrowing requirements. At the same time, current homeowners looking to upgrade are also facing difficulties in securing financing to re-enter the market. This is having a direct impact on increased rental prices. So there’s an undersupply of rental properties that’s pushing rentals higher – it’s a simple demand-supply dynamic. Landlords may refer to higher interest rates as a reason for raising rentals, but the availability of rentals is the real driver.
How long can this divergence continue?
With property yields on the rise, Landen’s Director Rashed Panabig explains:
“There’s a connection between the property and rental markets over the very long term as higher yields tend to drive higher property values. However, in the short term, the two markets have their own drivers.”
“We see the rental market remaining undersupplied throughout 2023 and probably well into next year so rents are likely to keep rising and the property values will remain under pressure until the RBA continues to pause their interest rate raising cycle over the coming few months. Once that happens, we expect investors to take advantage of higher yields by returning to the property market in force. Higher rentals are likely to add further incentive to the next bull market move. We’re advising our clients to position themselves for this rebound by buying into current market weakness.”