Want to know what the next boom looks like? Look here.
When trying to size up the shape of the coming boom, one of the biggest pieces of the puzzle is what’s happening to rents right now.
And I think this is something that people often forget – just how important rents are to price growth.
We understand it more intuitively with shares. If share in a company are paying more in the way of dividends, then obviously they’re worth more.
Because ultimately that’s what you’re buying when you buy a share – you’re buying a right to a share of the profits.
And the more profits, the more you are willing to pay for that right.
It’s the exact same thing with rents. Rents are the profits that come from a property. (Well, strictly speaking its revenues and there’s costs involved, but hopefully you get the point.
And other things being equal, when rents go up, profits go up, and so people are will to pay more for a right to those profits.
When rents go up, that pushes prices up.
And are rents going up
You betcha! Rents are going up in the most epic way on record.
According to the latest chart pack from CoreLogic annual national rental growth eased slightly to 9.4%; although it remains at a turbo-charged 11.3% across the combined capital cities:
Rental growth nationally is being driven by Perth (+13.5%), Melbourne (+12.9%), and Sydney (+12.4%).
11.3% in the capitals is an absolutely scorching pace, but what’s really unusual about the current period is just how sustained this current boom is.
It’s breaking all records.
CoreLogic reckon that Australia has recorded the strongest upswing in rents on record – i.e. 29.3% growth between September 2020 and July 2023.
It is also the longest stretch of consecutive rental growth (35 months) since 2013 – a record that will certainly be broken as rents across the nation continue to climb:
And rents will continue to climb.
Maree Kilroy of Oxford Economics, notes that the demand and supply for housing are moving in opposite directions, which will cause worsening housing shortages:
“Demand and supply for housing are moving in opposite directions. This will sustain a sizeable dwelling deficiency over the coming years”.
“It’s not until late 2024 that we anticipate market pressure will guide dwelling approvals back to growth”.
The Housing Industry Association (HIA) likewise warned that the “lack of new work entering the pipeline threatens to worsen the affordability crisis”:
“Australia has a structural undersupply of housing, with rental vacancy rates around the country at record lows, driving rents and dwelling prices to new heights”.
“The return of overseas workers and students, without an equivalent boost to housing supply, will exacerbate the situation”.
“The volume of houses commencing construction [is] expected to reach decade lows in 2024”.
Yep, the record run in rents will continue.
And for now, rising interest rates (which is an expense), is keeping profits contained and it’s not having a major impact on prices.
But once interest rates settle and normalise, then the impact of rents will feed through into prices.
And prices will surge.