New Insights into the Rental Market


Photo: Daria Nipot – Getty Images

Abstract

This article draws out new insights into the private Australian rental market using a new large administrative dataset of rental properties, which is an input to the Consumer Price Index (CPI). CPI rent inflation has picked up recently. Since 2021, rents have increased across inner-city and regional areas throughout all the states. Rent increases have also become more common and larger on average – particularly for the 2–3 per cent of properties each month that have a change in tenants. This is in contrast with the experience during the COVID-19 pandemic where rents fell in many suburbs close to central business districts but increased in regional areas, driven by a preference shift among many households for more space and net population flows.

Introduction

Access to appropriate and affordable rental accommodation is important for the wellbeing of renter households. According to the 2021 Census, close to 30 per cent of all households rent their home in the private rental market – a share that has risen over the past few decades. The 2019/20 Survey of Income and Housing (SIH) showed that renters tend to have lower incomes and spend a larger share of their disposable income on housing costs compared with owner-occupier households (both outright owners and those with a mortgage). The median private renter spends around 26 per cent of their weekly income on rent. Furthermore, rents (both public and private) currently make up around 6 per cent of the CPI basket, making it the second largest expenditure class. Understanding the rental market is important for policymakers as it has implications for patterns of consumption and savings by households, as well as inflation.

The rental market has tightened since late 2021, with vacancy rates declining over this period (Graph 1). During the COVID-19 pandemic, lockdowns and health concerns prompted many Australians to desire more space and to live with fewer people (Ellis 2022). The associated decline in average household size is estimated to have contributed to around 120,000 additional households being formed, with some of this demand materialising in the rental market (Agarwal, Gao and Garner 2023). More recently, the return of international migration – and, in particular, the return of international students – has added to demand for rental properties in the major cities. Advertised rents have grown strongly and finding a suitable rental property has become more difficult as vacancy rates have declined.

Graph 1

Line graph displaying rental vacancy rates in Melbourne, Perth, Sydney and Brisbane. The X-axis represents the date ranging from 2005 to early 2023 and the y-axis represents the vacancy rate (as a percentage). It shows how rental vacancy rates in all cities have declined since 2020. Vacancy rates in Brisbane and Perth declined earlier than Sydney and Melbourne and remain at lower levels as at December 2022.

Rents, as measured in the CPI, have also picked up of late but to a lesser extent than advertised rents, increasing by around 5 per cent over the year to February 2023 (Graph 2). Advertised rents measure the asking price for currently vacant properties; CPI rents measure price changes for the stock of all rentals.

Graph 2

A line graph displaying the CPI rents index and the CoreLogic advertised rents series expressed as an index with the index equal to 100 in June 2019. The x-axis represents the date, ranging from early 2005 to February 2023, the y-axis represents the index level. The chart highlights that advertised rents have increased significantly over the past three years, while CPI rents have had more modest increases. The chart also highlights that this period is unusual as the divergence between advertised rents and CPI rents is the largest since 2005.

The new rents dataset

As outlined in a recent ABS information paper, from July 2022 the ABS has incorporated a new data source to measure the rents series in the quarterly CPI and monthly CPI indicator (ABS 2022a).

The new dataset is comprised of information about rental properties as entered by property managers. The dataset begins in July 2018, is updated monthly and currently includes approximately 600,000 rental properties across both regional and capital city areas. In total, this represents 32 per cent of the national 2021 Census rental dwelling stock.

The dataset contains several variables of interest, including: weekly rent; property characteristics, such as type (apartment, townhouse or house), street name and postcode, and number of bedrooms; lease start and end dates; and a unique property ID.

The dataset only includes private rental properties. As such, the results shown throughout the rest of the article reflect outcomes for the private rental market and exclude rental assistance. By contrast, the measure of rents in the CPI includes prices for both the public and private rental market and accounts for rental assistance in the private rental market.

Rental market characteristics

Median rents began increasing in all states in 2021 and have continued to increase over the past year. In February 2023, the median weekly rent amount was highest in the ACT at $560 per week and lowest in South Australia at $380 per week (Graph 3).

Graph 3

Line graph displaying median weekly rents for all states in australia. The x-axis represents the date ranging from June 2018 to early 2023 and the y-axis represents the dollar weekly rent amount. It shows how median rents in all states have increased since 2021.

Around 90 per cent of lease agreements are for 12 months or less, with the bulk of these being 12-month leases (Graph 4). The share of six-month leases has declined since early 2021 in favour of 12-month leases. These figures reflect the share of currently valid leases and therefore understate the typical length of tenancy because renters may enter into a new lease agreement or a rolling month-to-month arrangement after their lease expires.

Graph 4

Line graph displaying the share of properties in the dataset with lease length according to 5 categories, 12 months, 6 months, >12 months, <6 months and 6-12 months. The X-axis represents the date ranging from June 2018 to early 2023 and the y-axis represents the the share of properties. It shows that the majority of leases are 12 months, with this share increasing in favour of six month leases since 2021. The share of the other categories is relatively stable.

Around 2–3 per cent of properties each month have a change in tenant (Graph 5). This turnover is similar across the states and has been broadly stable over the past four years or so. Quantifying the proportion of properties that have a change in tenant is useful as it helps to explain the large divergence between advertised rents and CPI rents. As discussed above, advertised rents have grown strongly of late; however, as they represent only a small proportion of the rental market, this has had a limited impact on the measure of rents included in the CPI.

Graph 5

Line graph displaying the share of occupied properties in the dataset with a change in tenant for that month. The x-axis represents the date ranging from June 2018 to early 2023 and the y-axis represents the the share of properties. It shows that 2-3 per cent of properties change tenant each month. This share is relatively stable over time.

Regional versus capital city rents

Rental properties in regional areas make up over one-quarter of all rental properties, and 10 per cent of all households rent their home in a regional area. The new dataset covers regional areas as well as capital cities, providing a rich source of information about rent inflation geographically since 2018. This allows for an exploration of rent price measurement for both finer levels of geographical detail and a broader geographical scope than the CPI, which covers only the eight capital cities.

Developments in population flows, vacancy rates and changes in households’ preferences over the past three years have been important drivers of rents. Early in the COVID-19 pandemic, demand for rental properties in inner-city markets declined as international students returned home, international migration slowed and some young adults moved back in with their parents. As well as overseas migration coming to an effective halt, people from parts of Australia that were not in lockdown at the time, including regional areas and smaller capital cities, tended not to move to cities that were in lockdown (Ellis 2022). The decline in international visitors and domestic business travel also encouraged some landlords to offer their short-term holiday rental accommodation on the long-term market, increasing the available rental stock (Evans, Rosewall and Wong 2020). Similarly, lockdowns prompted people to desire more space than densely populated inner-city areas could provide (Agarwal, Bishop and Day 2023).

As a result, rent inflation diverged during the pandemic across capital cities compared with regional areas. In general, rents increased the most in regional areas that are furthest away from a capital city, supported by net population inflows and low vacancy rates (Graph 6).

Graph 6

Line graph displaying year ended rent inflation according to 10 categories in terms of distance from CBD. The categories are <12.5km, 12.5km-25km, 25-50km, 50-75km, 75-100km, 100-200km, 200-500km 500-1000km and >1000km. The x-axis represents the date ranging from June 2019 to February 2023 and the y-axis represents the year ended rent amount. It shows that rent inflation has been higher on average over the past four years the further the property is from the CBD.” width=”620″ height=”426″ loading=”lazy”> </figure>
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<p>By contrast, rents decreased in some capital cities over the pandemic period, in part reflecting elevated supply of rental properties and weak demand because of travel restrictions and lower population growth. State governments also introduced mechanisms to enable tenants who became unemployed or lost income due to <span class=COVID-19 to negotiate rent reductions. Rent declines were largest in inner-city Sydney and Melbourne where renegotiations were most prevalent and where international travel restrictions led to the most pronounced increase in available rental properties (Evans, Rosewall and Wong 2020). More recently, rent inflation in capital cities and regional areas has picked up; both increased by around 6 per cent over the year to February 2023 (Graph 7). This is above the 4.8 per cent rent inflation published in the monthly CPI indicator for this period as the CPI also includes public rental dwellings and rental assistance properties.

Graph 7

Line graph displaying year ended rent inflation for capital city and regional properties. The X-axis represents the date ranging from June 2019 to February 2023 and the y-axis represents year ended rent inflation. It shows that rent inflation has been higher in regional areas that capital cities, over the past four years. More recently the gap between the two series has narrowed.

Rents in many inner-city areas remain below pre-pandemic levels

Although rents for properties that are close to a central business district (CBD) (less than 12.5 km) began to increase in 2021, rents for many inner-city suburbs in Melbourne and Sydney are still below pre-pandemic levels. In fact, 20 per cent of the 2021 Census capital city rental dwelling stock have rents below pre-pandemic levels, while 20 per cent have experienced rent increases of at least 10 per cent since March 2020 (Graph 8; Graph 9; Table 1; Table 2). Rent prices fell further and were slower to start increasing in Sydney and Melbourne compared with the other capital cities over 2020 and 2021. This was driven by the factors mentioned above, including a higher prevalence of rent reductions, higher vacancy rates and larger declines in net internal and overseas migration. Nonetheless, the rental market has tightened significantly in inner-city areas over the past year, particularly for new tenancies that have experienced large rent increases.

Graph 8

A two panel line graph of rent price indices by SA3 in greater Sydney and greater Melbourne with the index equal to 100 in March 2020. The x-axis represents the month, ranging from June 2018 to February 2023. The y-axis represents the level of the index. Each line is coloured according to the distance of that SA3 from the CBD, warmer colours (like red) mean that the SA3 is further from the CBD, while cooler colours (like purple) mean that the SA3 is close to the CBD (ranging from 0 to 80km). The graph shows that, in general, rent prices in SA3s close to the CBD declined further after the onset of the pandemic and remained lower for longer, with some SA3s remaining below their pre-pandemic levels in February 2023. By contrast, rent prices in SA3s far from the CBD have increased over the past three and have increased by up to 10 per cent over this period in some cases.

Table 1: Rent Prices Below Pre-pandemic Levels(a)

The table shows the expenditure share of rental dwelling stock with rent prices below pre-pandemic levels as a percentage. The rows reflect the distance from the CBD, one of 12.5km, 12.5-25km and >25km. The columns are Sydney, Melbourne, All other capital cities and total 8 capital cities. The table shows that rents for many areas within 25km from the Sydney and Melbourne CBD are still below pre-pandemic levels. By contrast, there are no areas in the other capital cities with rents below pre-pandemic levels.

Expenditure share of rental dwelling stock with rent prices below pre-pandemic levels
Per cent
SA3 distance to CBD Sydney Melbourne All other capital cities Total 8 capital cities
<12.5 km 49 62 0 36
12.5–25 km 10 17 0 9
>25 km 0 0 0 0

(a) To calculate these proportions, price indexes were created using rents for each SA3 by property type (e.g. houses, apartments and townhouses). Then, the proportion of rent expenditure for each SA3 by property type that index represented of total expenditure for the particular radius around the CBD was calculated. These proportions were then aggregated for those indexes below March 2020 levels in February 2023, to give the overall expenditure share of the rental dwelling stock with rent prices below pre-pandemic levels.

Table 2: Rent Prices At Least 10 Per Cent Above Pre-pandemic Levels

The table shows the expenditure share of rental dwelling stock with rent prices at least 10 per cent above pre-pandemic levels as a percentage. The rows reflect the distance from the CBD, one of 12.5km, 12.5-25km and >25km. The columns are Sydney, Melbourne, All other capital cities and total 8 capital cities. The table shows that rents, regardless of their distance from the Sydney and Melbourne CBD, are at least 10 per cent above pre-pandemic levels. There are many areas in the other capital cities with rents at least 10 per cent above pre-pandemic levels.

Expenditure share of rental dwelling stock with rent prices at least 10 per cent above pre-pandemic levels
Per cent
SA3 distance to CBD Sydney Melbourne All other capital cities Total 8 capital cities
<12.5 km 0 0 45 15
12.5–25 km 0 0 71 24
>25 km 2 6 87 26

Graph 9

Three panel line graph showing the share of capital city rent prices that remain below pre-pandemic levels. The top panel is Sydney, middle panel is Melbourne and bottom panel is all other capital cities. There are three lines in each panel showing the share of rents at or below pre-pandemic levels by SA3 distance to the CBD, the lines represent <12.5km, 12.5-25km and >25km. The x-axis represents the month, ranging from June 2018 to February 2023. The Y-axis represents the expenditure share of rents below pre-pandemic levels. The chart shows that many inner city areas in sydney and melbourne still have rents below pre-pandemic levels as at February 2023, as high as 50 per cent in some cases. However, there are no areas in the other capital cities with rents still below pre-pandemic levels.” width=”620″ height=”542″ loading=”lazy”> </figure>
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<h2>A closer look at the distribution of rent changes</h2>
<p>Rent increases have become larger and more common over the past year for most properties in capital cities. This is the case regardless of whether properties have a new tenant or not, although increases have been more pronounced for properties with a new tenant. Over the past year, rents have increased for almost three-quarters of properties, up from around one-quarter every year pre-pandemic. Rental prices for properties with new tenants are more likely to change than for properties with existing tenants. Over mid-to-late 2020, new tenants tended to pay rental prices lower than or equal to what was being paid for a given rental property the year prior (Graph 10). However, since mid-2021, the majority of new tenants have been paying higher rent than was charged for the same property the year prior. This share increased to as high as 94 per cent in February 2023, compared with 71 per cent for properties with existing tenants (Graph 11).</p>
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Graph 10

Line graph displaying the share of capital city properties with a new tenant and year-ended rent changes according to three categories: rise, fall and no change. The x-axis represents the date ranging from June 2019 to February 2023 and the y-axis represents the expenditure share of properties as a percentage. It shows that the share of properties with new tenants recording a year-ended rent increase has from its lows in early 2020 to record highs in February 2023.

Graph 11

Line graph displaying the share of capital city properties with an existing tenant and year-ended rent changes according to three categories: rise, fall and no change. The x-axis represents the date ranging from June 2019 to February 2023 and the y-axis represents the expenditure share of properties as a percentage. It shows that the share of properties with existing tenants recording a year-ended rent increase has also from its lows in early 2020 to record highs in February 2023, however this share is still lower than for new tenant properties.

The distribution of rent changes has shifted, with larger rent increases becoming more common for all properties regardless of whether tenants are new or existing. However, rent increases for properties with a new tenant have tended to be larger, on average, than for properties with existing tenants. In February 2023, over 60 per cent of properties with new tenants had rent amounts more than 10 per cent higher than 12 months earlier (Graph 12); this compares with only one-quarter of properties with existing tenants having rent increases of more than 10 per cent (Graph 13).

Graph 12

Area graph displaying rent changes of different sizes: share of properties, new tenants only. The y-axis represents the percentage change of propertise that experienced a rent change ranging from 0% to 100% at an interval of 20%. The X-axis represents months starting at 1 June 2019 to 1 Fenruary 2023 at an interval of four months. There are seven different groups of rent changes represented: <0%, No Change, >0-2.5%, 2.5%-5%, 5-7.25%, 7.5%-10% and >10%.<br />
The chart shows that the distribution of rent changes has shifted over time. During the pandemic, most new tenants moved in at a lower rent amount than a year ago. More recently, over 60 per cent of new tenants have paid a rent amount at least 10 per cent higher than a year ago and now almost no new tenants are paying a lower rent than a year ago.” width=”620″ height=”456″ loading=”lazy”> </figure>
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Graph 13

Area graph displaying rent changes of different sizes: share of properties, existing tenants only. The y-axis represents the percentage change of properties that experienced a rent change ranging from 0% to 100% at an interval of 20%. The x-axis represents months starting at 1 June 2019 to 1 February 2023 at an interval of four months. There are seven different groups of rent changes represented: <0%, No Chnage, >0-2.5%, 2.5%-5%, 5-7.25%, 7.5%-10% and >10%.<br />
The chart shows that the distribution of rent changes has shifted over time, during the pandemic the share of existing tenants paying a lower rent amount or the same compared with a year ago increased. More recently, over 60 per cent of new tenants have paid a a higher rent amount. Around 35 per cent of existing tenant properties are paying the same rent as a year ago.” width=”620″ height=”488″ loading=”lazy”> </figure>
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<p>Rents have increased at a faster pace for more expensive rental properties than for less expensive properties over the past year. Properties in the 90th percentile for weekly rent – that is, those properties with weekly rent amounts greater than or equal to 90 per cent of all properties – have experienced rent increases of 10 per cent on average over the year to February 2023 (Graph 14). By contrast, properties in the 10th percentile – or those properties with weekly rent amounts less than or equal to 90 per cent of all properties – have increased by 7 per cent on average.</p>
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Graph 14

Line graph displaying average year-ended rent changes for properties according to their weekly rent amount percentile, the 10th percentile, 90th and the median. The x-axis represents the date ranging from June 2019 to February 2023 and the y-axis represents the average year ended change in rent. It shows that average rent changes have been stronger (around 10 per cent) for properties in the 90th rent amount percentile than properties in the 10th rent amount percentile (around 7 per cent)

While an increase in rents puts pressure on household budgets across the economy, lower income households typically have the most constrained budgets as they spend a greater proportion of their income on essential items and have lower financial buffers. For example, all else equal, a 7 per cent increase in rent for renters in the 10th percentile of the income distribution would reduce the amount of income available for other uses more than a 10 per cent increase in rent would for renters in the 90th percentile of the income distribution.

Measuring rents paid by new tenants

The rents paid by new tenants provide a leading indication of price developments in the total stock of rental properties. Previously, the best available indicator of rents paid by new tenants was advertised rents; however, this may not be the most useful measure because the actual rent agreed to by a landlord and a new tenant may be different from the advertised amount. To overcome this concern, an index of actual prices paid by new tenants can be estimated using the subset of properties in the dataset each month that have a new tenant.

Actual rents paid by new tenants increased by 14 per cent over the year to February 2023, which is 9 percentage points higher than the increase in the monthly CPI indicator rent index (which measures all rents, not just those paid by new tenants). Since the onset of the pandemic in 2020, rents paid by new tenants have increased by 24 per cent and the CoreLogic advertised rent series has increased by 22 per cent (Graph 15). The index declined further than the CoreLogic advertised rent series earlier in the pandemic due to the actual rent agreed to between landlords and tenants tending to be lower than the advertised amount. More recently, rents paid by new tenants have increased above the CoreLogic advertised rent series because the actual rent agreed between landlords and tenants has been higher on average than the advertised amount.

Graph 15

A line graph displaying the estimated new tenant rents index and the CoreLogic advertised rents series expressed as an index with the index equal to 100 in February 2020. A henderson trend line of the new tenant rent index is also plotted, the trend is less volatile than the index itself and shows the underlying moment in the index. The x-axis represents the date, ranging from June 2018 to February 2023, the y-axis represents the index level. The chart highlights that the increase rent prices for properties in the dataset with new tenants since February 2020 has been comparable to the advertised rent series.

Rents for apartments with new tenants have been more volatile than for houses and townhouses over the past couple of years, in line with the developments in the rental market discussed above (Graph 16). Rents for apartments with new tenants fell sharply during the pandemic and remained below pre-pandemic levels until early 2022, while rent inflation for houses and townhouses with new tenants has generally been positive since the onset of the pandemic. Rent inflation for apartments with new tenants was 24 per cent over the year to February 2023, whereas the overall index increased by 14 per cent. By contrast, rent inflation for houses and townhouses with new tenants was around 10 per cent over the year to February 2023.

Graph 16

A line graph displaying the estimated new tenant rents index by property type (apartment, townhouse or house). The index is equal to 100 in February 2020. A henderson trend line of the new tenant rent indices is also plotted, the trend is less volatile than the index itself and shows the underlying moment in the index. The x-axis represents the date, ranging from June 2018 to February 2023, the y-axis represents the index level. The chart highlights that rent prices for apartments in the dataset with new tenants fell sharply during 2020, but have increased significantly since late 2021. By contrast, rent prices for houses and townhouses have generally increased since 2020. The series are at least 20 per cent above their February 2020 levels.

If vacancy rates remain low, then stronger-than-normal increases in advertised rents are likely to persist. This will impact the CPI both directly, given that these properties are included in the calculations, and indirectly as increases in market rents influence landlords’ price-setting behaviour in the rest of the rental market.

Conclusion

The rental market has tightened considerably since 2021. Rent inflation has picked up and is broadly based across new and existing tenants, property types and the states. Rent increases have also become more common, and larger on average. Properties with a change of tenant have experienced larger rent increases than existing tenancies, and so have been more closely aligned to changes in advertised rents. The new dataset on rental prices discussed here has enhanced the measurement of rents in the CPI and afforded new insights into the private rental market.

References

ABS (2021), ‘More than 40 per cent of Australians Worked from Home’, Media Release, 14 December.

ABS (2022a), ‘Introducing a monthly CPI indicator for Australia’, 16 August.

ABS (2022b), ‘Annual weight update of the CPI and Living Cost Indexes’, 20 December.

Ellis L (2022), ‘Housing in the Endemic Phase’, Keynote Speech to the UDIA 2022 National Congress, Sydney, 25 May.

Agarwal N, R Gao and M Garner (2023), ‘Renters, Rent Inflation and Renter Stress’, RBA Bulletin, March.

Agarwal N, J Bishop and I Day (2023), ‘A New Measure of Average Household Size’, RBA Bulletin, March.

Evans R, T Rosewall and A Wong (2020), ‘The Rental Market and COVID-19’, RBA Bulletin, September.

Source: Reserve Bank of Australia [2021]