S2 E3 - Analysing the latest rental market developments with Eliza Owen

In this episode, host Andrew McCann is joined by Eliza Owen, Head of Research at CoreLogic, to delve into the current state of Melbourne's rental and investor markets. They discuss the significant growth in rent values and the persistently low vacancy rates, highlighting the challenging situation for renters. 

Eliza explains the underlying factors driving these trends, including migration, supply and demand dynamics, slow new dwelling construction, and fluctuating interest rates.

Transcript

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Hello, and welcome to another episode of Inside Melbourne's Property Market. Brought to you by Jellis Craig. I'm your host, Andrew McCann. In today's episode, we'll be diving deep into the rental and investor market, and I'm delighted to be joined by our guest, the head of research at Property analytics firm, CoreLogic, Eliza Owen. Eliza, thanks so much for being here. It's great to have you. We are really interested in diving deep into your thoughts and insights into the rental market, both nationally and in Victoria. Obviously with your role at CoreLogic, you said lots of data and you're constantly analyzing, really interested in your insights. What are you seeing across the country from a rental market perspective? The rental market's been fascinating to watch. Over the past few years. We've gone from an environment where average annual growth in rents was only 2% a year each year throughout the entirety of the 2010s. And now we're in this completely different post pandemic environment where rent growth has been really strong on a broad basis. In the past 12 months, rent values have gone up about eight and a half percent nationally, and for Melbourne it's a little bit stronger at the It's really interesting. I mean obviously from our lens we've come out of Covid when there was an enormous amount of supply and availability of rental properties to now having an incredibly low vacancy rate. What are the drivers that sit behind that? Part. Of the demand side that started in 2021 was when people were getting higher levels of fiscal stimulus from the government and income growth was strong as inflation was heating up. And I think because of those stronger income factors initially, as well as lockdown conditions, we saw this fascinating trend of share houses in particular, which are often rental households breaking up and people spread out across the rental market. Average household size in Australia declined from about 2.6 people per household to 2.5 people. Doesn't sound like a lot, but the RVA estimates that that little decline in average household size contributed to dwelling demand by 120,000 properties. And this is in 2021 when our borders are closed. So then when we reopen the borders to overseas migration, that's dumping a whole lot of additional demand. Most of those overseas migrants are renters when they first get here as well. And Melbourne historically has attracted the largest share of overseas migration. So you've got an already tight rental market, you put a whole lot of pressure from overseas migration on top of that, and in the meantime you've got rising interest rates, which starts to affect supply as investors taper off and sit back. And that disruption to investment property purchase, which is a little bit recovered in Victoria, not so much at the moment. But yeah, the supply side was disrupted as you have those immense demand pressures. So we've definitely moved into a supply and demand environment, haven't we there? There's a lack of supply and there's increasing demand. Where are we seeing most of that demand come from? Is it a migration conversation more than anything? At the moment, yes. Like I say, I think earlier in the pandemic it was probably more about household composition, but more recently, two Victoria net overseas migration has hit this record high of over 160,000 in the year to September 23. That's the latest available data. And if you assume that average household size of 2.5 people per household, you need more than 60,000 dwellings in the state to accommodate that new population just from overseas migration. Not to mention kids moving out of home or going to uni and finding somewhere to rent. So with that additional pressure, the level of construction that we've actually seen in the year was about 55,000 in Victoria. So it just shows, I guess the supply demand mismatch and the fact that construction can't really keep up because the incentives aren't there to build new investment stock from an interest rate perspective. So we're probably not going to see that washed through for a period of time. Interest rates is always a topic that has so much influence around the property market, whether it's buying, investing, how does that influence the rental market? Does it have an impact on investors and their motivation to enter? And on the flip side to that, how does it affect tenants and their appetite to become buyers one day? Absolutely. So when interest rates are rising, it's the cost of money. So when the cost of something rises, demand for it goes down. That's historically why you've seen housing finance have this kind of inverse relationship with movements in the interest rate. And across Victoria, we've seen the housing for investment property, sorry, the finance free investment property purchases peaked at about $3 billion through the pandemic period. It's now down to about 2 billion as of March, 2024. And it sounds like a lot, but the share of investor finance lent for Victorian property purchases is declining. And I think it's not until we get on the other side of the high interest rate environment that we'll really start to see that investor demand come back, which is a shame because Melbourne in particular is a relatively good buyer's market right now and rents are rising. They were up, like I say, another nine and a percent in the past 12 months, up about 25% since the start of the pandemic. Some of the numbers in terms of gross rent yields are looking pretty good as a result. So what does that mean for, does any of the data suggest that there is a flow on effect and that the apartment market which has seen limited capital gain? I think we could certainly speak to that at Jellis Craig and say we've seen that as maybe the most suppressed market within our network and the activity that we have is now and the next 12 and 24 months, a good time to see investors reenter the market. So investors tend to follow capital growth and when property values are rising very strongly, that's where you'll see more investor interest, I think because of the softer growth conditions we're seeing across Melbourne and Victoria more broadly. That's sort of subduing investor activity, but if you did want to look at a kind of countercyclical strategy, it's probably a really good time to be a buyer in Victoria. Days on market are higher gross rent yields, as we've discussed, are rising as well, and property prices are relatively affordable When you look at some of the changes in value we've seen in other states and territories. Yeah, well, we certainly, I think to give some confidence to those that are considering investment, we've never seen the market stronger from a tenancy pool perspective. There is enormous demand for people that are out looking to secure in the city apartments especially, and that is the segment of the market that's shown the best value. So let's hope that we see that trend continue. I'm interested, obviously the tenancy space is challenging. We talk about Melbourne and the whole of the country being undersupplied for housing. What can tenant look to over the next 12 and 24 months? Is there going to be a shift in trend there? Is there some light at the end of the tunnel for that challenge of increased cost and pressure around competition? So a lot of this stuff is cyclical. Eventually rent prices have to stop going up as strongly as they have because people just won't be able to afford to sustain the high increases that we've seen recently. Unfortunately, I don't think that cyclical downswing is coming for quite some time. Just the supply demand mismatch that we've talked about, and also the fact that rent growth is slowing very, very gradually. There's not too much sign of Melbourne's rental market coming off the boil in the short term. And again, that probably comes back to the fact that with the supply issue, we're not seeing more of that supply developed. So it's going to be hard to see those conditions change, isn't it? Not only that, but of the projects that are getting approved and commenced, it takes a longer time now for those to be completed. There's a lot of challenges in the construction sector that have stemmed from supply chain disruptions through Covid, also shortages in the labor force for the construction sector in particular, which has blown out project completion times. Eliza, today's conversation has been really insightful in and what you're seeing. I think we're always interested in predictions. Everyone's interested in what can we expect for the future. You've got to so much data at CoreLogic, you see the trends ahead of the rest of us. What are you seeing for the future and what predictions have you got for 2025 and beyond? I would imagine that rent growth is going to remain pretty strong over the next couple of years, but gradually the pace of growth should slow down in terms of pricing for the Victorian housing market. There are some headwinds in the short term, especially as economic conditions slow down and consumers respond to the high inflationary high interest rate environment. Having said that though, the flip side of more soft capital growth performance is better affordability, better accessibility, and we see first home buyers as a really big opportunity for the Victorian market. It's got the highest share of first home buyer finance of the states and territories. And I don't see that going away anytime soon. And I think from a Jellis Craig point of view, we're always optimistic as to the future. And Melbourne's such a livable city migration, the demands and the like. They all spell for positivity, don't they? But it's a case of keeping up. So this supply of housing, we obviously need to see some stimulation in the supply, don't we? Yeah, and I think it'll definitely be a better story for renters once investors are back In the interim, the government is very focused on trying to deliver more housing supply and even more avenues of rental accommodation. But like you say, I think we focus a lot at times on a particular cycle or a particular year in the property market. Melbourne is one of the best cities in the world and I can't see it being in the doldrums in terms of price growth for an extended period of time. Eliza, we've had such a great conversation today. We've learned so much from you. We really appreciate your contribution. Thank you to you and our partnership with CoreLogic. Thanks so much for being with us. Thanks for having me. And that concludes this episode of Inside Melbourne Property Market with Jellis. Craig, thanks so much for being with us. Some wonderful insights from Eliza. Certainly. If you'd more information in regards to anything that's been discussed today or anything topical, please go to our website and download a copy of the report. 25.