Tight rental markets in Sydney and Brisbane lead national uptick
Annual rental growth in Australia’s capital cities has accelerated for the first time in over two years, prompting renewed scrutiny of housing inflation risks.
Cotality’s rental value index for capital cities climbed 3% in the year to July, up from 2.7% in June. This marks the end of a 16-month period during which rental growth either slowed or remained steady.
“The housing component makes up more than one-fifth of the CPI basket, with rents alone accounting for 6.6%,” said Kaytlin Ezzy, economist at Cotality. “While this easing of growth reflects an overall moderation in rental demand – amid normalising net overseas migration and an uptick in average household size – the ABS noted that the annual growth in rents paid would have been higher had it not been for changes in Commonwealth Rent Assistance reducing the amount payable for eligible tenants.”
Recent data from the Australian Bureau of Statistics (ABS) shows rents paid increased 4.5% over the year to June, down from a 7.8% rise in the year to March 2024. Ezzy noted that the correlation between the CPI’s rents paid measure and the Cotality rental value index suggests the latest uptick is significant.
“Given the strong, albeit lagged, correlation between the CPI’s rents paid and changes in the Cotality rental value index, the recent uplift is a trend to watch,” Ezzy said.
Construction costs have also edged higher, with the Cordell Construction Cost Index rising 2.9% in the year to June, compared to 2.6% in the previous 12 months.
“While still well below the pre-COVID decade average of 4%, this re-acceleration mirrors the recent quarterly increases in the ‘new dwellings’ component of the CPI basket — the only subcomponent with a larger weighting than rents (7.6%),” Ezzy said. “With both rents and construction costs indicators trending higher, we could see housing inflation rise in the coming months, which, if it feeds back into the inflation outlook, could lower the chance of future rate cuts.”
Sydney and Brisbane recorded the strongest increases in rental growth among the capital cities. Sydney’s annual dwelling rent growth rose from 1.8% in May to 2.4% in July, while Brisbane’s annual rate increased from 3.2% in February to 4.6% in July.
“In particular, these cities’ unit markets have driven this uptick, with the pace of rental growth in Brisbane and Sydney’s medium and high-density sectors up 2.3 and 1.1 percentage points respectively from recent lows,” Ezzy said.
Vacancy rates remain low in these markets, contributing to ongoing tightness. Analysis of sub-regions showed Brisbane and Sydney dominated the top ten areas for rental growth acceleration, with Carindale in Brisbane and Botany in Sydney leading the list. Bayside in Melbourne’s Inner-South was the only area outside Sydney and Brisbane to feature in the top ten. However, Melbourne overall has not seen an increase in the pace of rental growth, with annual growth steady at 1.1% in July.
Nationally, property listings remain limited. Only 121,113 properties were listed for sale in the four weeks to August 3, nearly 20% below the typical level for this time of year. Every capital city and regional area reported fewer new and total listings compared to last year.
“This persistent shortage of stock is seeing buyers faced with increasingly limited options, skewing selling conditions back in favour of vendors,” Ezzy said.
She added that smaller vendor discounts and a capital city auction clearance rate of 69.4% –the highest in 17 months – reflect this trend.
“With demand expected to be further buoyed by the August rate cut, and conditions skewed towards buyers, we should be in for a strong spring selling season once the flow of new listings normalises.”
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