Investors are returning to the market, and that’s good news for renters

Increased investor activity will help support construction and work to rebalance the rental market by adding more rental properties and ease conditions for renters. This is expected to slow rent price growth over 2024.

However, rental market conditions remain challenged after a difficult 2023.

Record low rental vacancy rates meant rental homes were hard to find, with just slightly more than 1% of rental properties available to rent across capital cities and regional Australia throughout last year.

Rental properties that were available were snapped up quickly, with typical rental properties leasing more than a week faster than before the pandemic.

This led to a surge in rents. Advertised rents in capital cities increased 13% over the year, placing huge financial pressure on tenants.

While rent growth in regional parts of the country was more moderate, it follows a period of particularly strong growth early in the pandemic, with typical rents now $135 per week more than before the pandemic.

In capital cities, typical rents are now $165 more per week than before the pandemic –with rents continuing to grow strongly due to tight market conditions.

Stronger rents have encouraged investors

The shortage of rental properties and rapid growth in rents has started to encourage more investors into the market

In Australia, more than 80% of renters live in privately owned rental properties, so renters rely on other households providing rental accommodation.

Despite sharply higher interest rates, which can dampen the appeal of property investment, the number of investors taking out loans for property remains well above pre-pandemic levels, after dipping in late 2022.

This is good news for renters – the best way to slow rent increases is by increasing the supply of rental homes to match demand.

But the rental stock is only growing slowly

Part of the reason rental markets are so difficult at the moment is that during the pandemic many existing investors chose to sell their rental properties.

Initially, this followed significant uncertainty about the economy and rental demand as borders closed. Later this was often a response to very strong home price growth as the pandemic progressed.

PropTrack data indicates that for much of 2021 more rental properties were being sold across Australia than new rental properties were being added to the market. The total number of rental properties fell very slightly over 2021.

New rental properties, and sales of existing rentals, are identified as properties listed for rent during each ownership period.

This is rare. New homes are more likely to be bought by investors so construction leads to growth in the number of rental properties.

But there has been better news for renters lately. Over 2022 and 2023, the share of rental properties being sold by their owners moderated. This means that the total number of rental properties is estimated to have grown by a little more than 2% in each of these years.

While this outcome was much better than the fall in 2021, this growth remains far below the rate seen before the pandemic. And this rate has clearly not been fast enough to prevent the rapid rent increases that have been experienced recently.

Slower growth in the number of rental properties since the pandemic has left the total number of rental properties more than a quarter of a million homes below where pre-pandemic growth rates would have put them.

Some of this story is good news: many homes sold by investors were bought by first-home buyers during the pandemic.

The pandemic saw the highest level of first-home buyer activity since 2009 as government incentives and low interest rates lowered the hurdle for many to enter homeownership.

But to a large extent, this reflects weaker home building since the pandemic, owing to uncertainty and supply chain disruptions. Had more homes been built, the rental stock would have increased at a faster rate and rent growth would have been much more moderate.

More investor involvement will bring easier conditions for renters

Investors are key for the financing of new development projects.

Particularly for apartment developments - which can require buyer deposits years in advance of completion - investor interest is crucial.

The re-emergence in investor activity in 2023 heralds good news for the overall health of the market. This will help to drive more new construction, which will slowly rebalance supply and demand in the rental market.

In the short term, renters will continue to find the market difficult. The number of available rentals looks to remain low in the near-term. While rent growth has slowed, we expect the high level of rents will persist and further growth will continue.

But we are slowly seeing the market rebalance following the significant disruption of the pandemic and that is something many renters will be happy to see.