Big cities exposed to rent drops?

By Gerv Tacadena | 24 Jun 2020

Sydney and Melbourne's rental markets are starting to loosen as the supply in each city continues to rise as demand depletes, according to the latest market report from CoreLogic.

According to CoreLogic, the share of advertised rental housing increased in the two cities in May, bucking the downtrend recorded by the rest of capital city regions.

The share of advertised rental stock increased to 4.5% in Sydney and to 3.6% in Melbourne.

Eliza Owen, head of residential research at CoreLogic, said while 3.6% appears small, it represents a total rent listing increase of more than 3,000 in Melbourne, which means there were 27,000 properties for rent over the month.

"An increase in the portion of stock on the market suggests higher vacancies and a looser rental market, which would coincide with falling rent prices," she said.

Also read: Big Changes To Tenancy Rules Kill Investor Demand?

Why the increase?

The increase in advertised rental stock was only apparent in Sydney and Melbourne. While rental markets across Australia have been affected by the COVID-19 outbreak, Owen said Sydney and Melbourne have to bear the brunt of these impacts.

Overseas migration is one of the biggest determinants of rental accommodation. Given the closure of borders and travel restrictions, demand for rental homes slowed down.

Of all capital cities, Sydney and Melbourne remain the top destination for overseas migrants. In fact, the two cities welcomed over 70,000 migrants over the financial year 2018-2019 — this is significantly higher than the net migration recorded by other capital cities.

Owen said another reason was Sydney and Melbourne's exposure to international students.

"With foreign student numbers falling by close to 100% compared with a year ago, along with domestic students largely studying from home, rental demand from tertiary students has been depleted," she said.

It is also worth considering that New South Wales and Victoria make up the larger share of housing investments.

Owen said almost two-thirds of investment loans over the past 10 months originated in these two states. Investor activity, she said, contributes substantially to rental supply.

"When paired with the large number of units that have been built over the past few years, many of which are rentals, and it's clear that rental supply has increased more in Sydney and Melbourne relative to the other cities.  Higher supply levels against a backdrop of weaker demand is a recipe for lower rents," Owen said.

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