While the housing market built momentum through the end of 2020 to usher in a strong start to the new year, rental markets could still be reeling from the negative effects of COVID-19 over the next year.
According to the latest Hedonic Home Value Index from CoreLogic, rental conditions diverged substantially across 2020 depending on the capital city you are looking at.
The annual change in rents has been strongest in Perth and Darwin, where house rents are up around 10 per cent in both cities and unit rents are 6.8 per cent higher in Perth and 7.6 per cent higher in Darwin.
CoreLogic’s research director, Tim Lawless, attributed the strength in Perth and Darwin rentals to strong demand and a recent history of minimal supply additions.
According to him, both Perth and Darwin have recorded below-average levels of investor activity since housing market conditions started to cool in mid-2014, which has led to a shortage of rental stock.
“More recently, with stronger interstate migration driving housing demand, rental rates have been under substantial upwards pressure as demand for rentals outweighs supply,” Mr Lawless added.
However, while rents are surging higher in Perth and Darwin, the longer-term trend highlights the weak rental conditions that persisted in those locations prior to the recent upswing.
Perth rents remain -10.4 per cent lower than the previous peak in May 2013, and Darwin rents remain almost -20 per cent below their 2014 peak.
Meanwhile, rental conditions across the Melbourne and Sydney unit markets saw sharp drop in rents due to weak demand and high supply, the report noted.
Melbourne unit rents are down by -7.6 per cent over the calendar year and Sydney unit rents are down by -5.7 per cent.
Inner city rentals have been particularly impacted by stalled overseas migration, with lower overseas student numbers to blame.
Further exacerbating the weak inner city demand is the recent history of high-rise apartment construction in Melbourne and Sydney, with the pipeline of new units still under construction remaining well above the decade average, CoreLogic explained.
According to Mr Lawless, it means “weak rental conditions across the unit sector are likely to persist until overseas migration starts to ramp up and the higher levels of supply are absorbed”.
What to expect from rental yields?
In terms of rental yields, combined capitals and combined regionals alike also witnessed mild downwards pressure through the COVID period.
Gross yield across the combined capitals region reduced from 3.51 per cent at the end of 2019 to 3.42 per cent in December 2020, while yields across the combined regional areas have reduced from 5.03 per cent last year to 4.83 per cent this year.
“Despite the lower yield profile, with interest rates likely to remain at record lows for some time yet, the opportunity for positive cash flow properties is becoming more prevalent,” the research director observed.
“Opportunities for positive cash flow properties along with the potential for capital gains is likely to see investment activity consistently lift through 2021.”