Rental rates across Australia’s capital cities fell over the June quarter as renters look for more affordable housing options.

Renters have been hit hard over the last three years with rents across the country rising by an average of 30 percent over this period; renters, on average, are now paying $95/week more to the landlord than three years ago.

In fact, rental rates have been rising steadily since housing affordability became a real issue in the early part of the new decade. As more households were financially blocked from buying a home the only other option was to rent. As demand for rental accommodation grew, the supply of new housing and investor numbers remained consistently low (the market is reliant on private investors to provide the vast majority of rental housing). The net result of this high demand and lack of new supply is that there has been a large amount of upwards price pressure on weekly rents.



More recently the rental market appears to have peaked with national weekly median rents falling slightly in each month post March ‘09. Weekly house rents fell by 3.5 percent ($15) over the June quarter. Unit rents have been much more resilient, recording a fall of just 0.6 percent over the June quarter.

The easing in weekly rents comes as housing affordability returns to levels not seen since 2002 thanks to interest rates reaching 5.75 percent and modest falls in housing values. The improvement in housing affordability together with declines in rental affordability has caused many renters to assess whether buying is now a better option than renting. A recent study conducted by rpdata.com on behalf of the Commonwealth Bank of Australia showed there had been a substantial increase in the number of suburbs around Australia that are now cheaper to buy than rent.

The largest falls in house rents have been recorded in Canberra where the median weekly rent is down just over 6 percent for the June quarter. The median weekly rent for a Canberra house has fallen from $530 in March ‘09 to $498 in June.

At the other end of the spectrum, the only mainland capital city to record an improvement in the median weekly rental rate was Darwin which now has the most expensive weekly rental rate for houses of any capital city. On average, renters in Darwin are paying about $100/week more to rent a house than someone renting in Sydney.

The resilience of the rental market for units is not surprising. Unit rents have virtually remained steady since March and actually improved in Brisbane, Darwin and Adelaide over the June quarter. With rental affordability becoming a real issue it is likely more renters are choosing units rather than houses for the lower rents, lower upkeep and the fact that they can live in more desirable locations compared to detached housing rents.

With rental rates now coming off the boil and property values once again rising we are seeing the first signs of rental yields being eroded. Nationally, the gross rental yield for houses peaked at 4.7 percent in March and has since fallen to 4.4 percent due to a fall in weekly rents and increase in house values of 2.1 percent over the quarter.

The average gross rental yield for units has fallen only slightly (5.4 percent to 5.3 percent over the June quarter) thanks to rents staying relatively firm and a lower rate of growth in unit values over the quarter (1.2 percent). For investors, units have historically provided stronger rental yields and it looks set for this trend to continue.

Renters shouldn’t get their hopes up too much however. Vacancy rates remain tight across the nation with all capitals recording less than 3 percent vacancy in rental stock. With such low vacancy rates and not a great deal of new supply entering the market it is logical to expect weekly rents to avoid any significant declines for the foreseeable future.

Investors shouldn't be discouraged by the recent peak in rental markets. Rental yields remain historically higher than the long term average and competition amongst investors hasn’t gathered too much pace just yet. Additionally capital growth has once again become evident which demonstrates the resilience and consistency of returns in the Australian residential property market. The figures presented above outline the broad trends in the market – astute investors need to be digging below the surface of these macro trends and identifying strategic markets that will satisfy their investment criteria (our new Suburb ScoreCard product is ideal for undertaking this suburb level analysis).