ADVERTISED rental stock in the inner Melbourne and Sydney markets surged 60% between March and June as the pandemic forced many to move back to their family home, and the oversupply has pushed down rents, according to the latest ANZ/CoreLogic Housing Affordability report shows.
ANZ economist, Felicity Emmett said the fall in demand for rental properties in inner Melbourne and Sydney was due to their service economies, as people working in industries hardest hit by Covid-19 were also most likely to rent.
Nearly 40% of people who work in the accommodation and food services sectors rent. Between the weeks ending 14th March and 27th June, 21% of hospitality workers lost their jobs, compared to an average of 6% across all industries.
Inner Melbourne recorded a 57% increase in advertised rental properties while Sydney’s city and inner south both recorded a 53% jump. All other capital cities saw a drop in total rental listings.
Australian Bureau of Statistics data shows the number of those employed across accommodation and food services and arts and recreation services averaged 1.17 million over the year to February, equating to about 9.1% of the labour force.
The report said the rental market has been more heavily affected than the buyers’ market, with a combination of falling demand and rising supply.
“Households who rent have been more widely impacted. People who work in the hospitality sector, where job and income losses have been the deepest, have a much higher likelihood of renting than owning homes. And while there has been a formal program to defer mortgage payments, relief for renters has been much less defined,” Emmett said.
While job losses in these sectors have reduced demand for rentals in these areas, government boosts to JobSeeker and the JobKeeper program have helped offset this to a degree, while an index of job changes since the 14th of March suggest that the heavily impacted sectors have had better recovery than total combined sectors over May and June.
The arts and recreation services sector has recovered 7.8% since bottoming out in April, and accommodation and food services by 19.0%, while total payroll jobs have risen just 4.2% in the same period. Emmett said this could signal some stabilising demand in the rental market.
“The lack of overseas migration has also contributed to falling demand as about 80% of newly arrived migrants rent. This drop-off in demand will impact regions popular with migrants, including inner city and south-eastern Melbourne, and inner south west Sydney.”
Inner city rental values weaken
Oversupply has pushed rental values down as much as 7% in suburbs such as Haymarket and Barangaroo in Sydney and Southbank in Melbourne. The pressure on rents follows a subdued period of annualised growth, broadly tracking below inflation at 0.9% across the capital city markets for the past five years.
Some areas such as inner city Melbourne have seen rental demand hit because of the departure of temporary migrants or lack of new arrivals, but this has extended to metropolitan areas such as Parramatta and Blacktown in Sydney, and Melbourne’s south east.
The Sydney regions with the steepest decline in rental values between March and June are the city and inner south, both down 4.1%, followed by the eastern suburbs (3.7%).
Melbourne has been supported by historically high international migration, receiving the highest number of net overseas migrants of the capital cities in 2018/19 at 77,369. The pause on international migration has dragged rents down across greater Melbourne by 1.0%, driven by a 2.0% fall in unit rents, while house rents declined 0.3%.
Covid-19 has wiped 0.9% off rents in the Brisbane, which had been in recovery mode from an influx of investor grade stock over 2016. ABS completion data suggests 21,342 units were completed, against a historic average of 11,585 per year.
Rent values were already seeing downward pressure in the ACT and Hobart in the lead up to the pandemic as a result of affordability constraints for the renting population. Hobart has seen the steepest rate of decline of the capital markets from March to June, falling 2.3%, but ABS shows wages paid fell 6.3%, meaning affordability may not improve.
Despite the recent rise in volumes over the past few weeks, listings are still relatively low compared with the equivalent 28-day period in 2019. Total rent listings on market across the combined capital cities were down 15.3% compared annually, but the pile-up in rental stock amid Covid-19 is starting to show. The average gap between total listings volumes in 2019 and 2020 to May was 23.2%.
Sydney and Melbourne are accounting to most of the build up in rental listings. Between 15th March and 28th June, rent listings across Melbourne rose by 3,730, Sydney rent listings rose by 1,043, and other capital cities saw a decline in rent listings on the whole.
New rent listings across the combined capital cities increased 2.2% between the 28 days ending 28th of June, and the 28 days ending 31st of May. Total rent listings declined 3.7% in the same period.
Another factor contributing to increased rental supply is the conversion of short term accommodation such as Airbnb to the long term rental market. The report said this has been supported anecdotally, with real estate agents reporting that they have assisted Airbnb owners to market their property for a longer-term tenants. Researchers from the University of Queensland estimate 346,581 properties – about 4% of the country’s housing stock – had been used for Airbnb at some point between July 2016 and February 2019. The highest counts of Airbnb listings were in Melbourne, Surfers Paradise, Point Nepean, Byron Bay and the Sydney-Haymarket-The Rocks region.
The switch from Airbnb to longer term leasing is likely to be temporary, and landlords may want to revert properties back to short-term holiday accommodation soon as domestic and international travel resumes.
The report said it is “fortunate” that investment participation in the property market had been correcting from very high levels in the lead up to Covid-19.
“It means that more property was being purchased by owner occupiers, who may be less likely to offload property assets amid economic uncertainty, thus reducing some overall risk to the property market.
“If investor participation remains low, this could keep rental market conditions relatively steady.”
Rental yields have remained relatively steady, albeit around historically low levels amid Covid-19 at the aggregate level. Typical gross rental yields were 3.7% in June, relatively steady on March, but 40 basis points lower on June 2019, largely a function of property values moving 7.8% higher year on year while rental rates held firm.
Similarly, capital city gross rental yields are 3.4%, which was steady on yields in March, and 43 basis points below June. Sydney gross yields were a record low 2.9%, 3.2% in Melbourne, 4.4% in Brisbane, 4.4% in Adelaide, 4.4% in Perth, 4.7% in Hobart, 5.9% in Darwin and 4.7% in Canberra. Sydney and Melbourne are unlikely to improve as dwelling values are tested in the coming months.
Gross yields declined by just 21 basis points across the regional markets and rent yields are at a relatively strong 4.9%.