Last week, June inflation came in at an eye watering 6.1 per cent, driven primarily by sharp rises in fuel prices, construction costs and furniture. To anyone who drives a car, is building or renovating or furnishing their home, this is not surprising. One surprising absence from the list of what is growing quickly however was rents. Rents increased by only 1.6 per cent, well below the inflation rate. This is inconsistent with what we are seeing on the ground with available rental properties, as well as the rate of growth in advertised rates.
While inflation numbers are showing a 1.6 per cent increase in rents, data on median advertised rents shows a much more aggressive increase of 13.6 per cent for the same geographic area (average of eight capital cities). Why is there such a mismatch between the two numbers?
Our first thought was that someone’s data collection is not working properly. The strong increase in rental increases showing up in advertised rents is however consistent with what we are seeing with Ray White rental listings. There has been a dramatic fall in properties available, which supports strong growth in what people are advertising vacant rental properties. Anecdotally, our property managers are also seeing a shortage of properties available – demand is much higher than available supply.
The Australian Bureau of Statistics calculates rental growth by tracking the rents paid on a sample of rental dwellings in each city over time. As such, they don’t rely on advertised rents but rather the rent that people are actually paying. Both data sets are reliable but they are measuring different things – market rents (in the case of advertised rents) versus existing rents (in the case of CPI rents).
Fundamentally what seems to be happening is that tenants with leases already signed are not paying market rents. Although landlords could theoretically take their property to market and achieve a better rent, they aren’t doing so right now.
There are a number of reasons why this may be the case. The main reason is that it likely takes some time for the sharp increase in advertised rents to show up in sitting rents. Leases are typically signed for 12 months and breaking leases by a landlord is relatively uncommon. Rent increases for sitting tenants also can’t be implemented immediately and there is a notice period that must be given. If we look historically, there is generally a lag between high growth in advertised rents and sitting rents. This occurred in 2008 following the Global Financial Crisis when advertised rents jumped and this flowed through to existing rents around 12 months later. It didn’t happen following the 2019 jump in advertised rents however the start of the pandemic in 2020 and the subsequent legislation brought in to protect renters was likely a factor here.
The second is that having a stable tenant that looks after a property and pays their rent on time is valuable for a landlord, and the risk of losing that tenant may not be seen as worthwhile even if better rents are possible if they take the property to market. The third is that the process of re-letting a property may be seen as time consuming and expensive for the landlord so again, not worthwhile for extra rent.
Overall, what this shows is that for renters right now with secure leases, we are not seeing a rental crisis. The crisis however is occurring for those that are looking for a rental property right now, whether that is because their lease term is over, they are looking for a bigger (or smaller) property to live in or they have moved to a different geographic area.
With population growth expected to be higher this year than the past two years and problems in the construction industry limiting new development, this rental crisis for those looking for homes looks set to continue. And given that it is likely that high advertised rents will at some point flow on to sitting tenants like they did in 2009, higher rents will show up in our inflation numbers next year. Not great news for renters and by extension not great news for homeowners given continued high inflation means higher interest rates.