Rental growth outpaces capital growth in recent times

Over the last five years the debate about the affordability of purchasing a home has intensified. What is often missed is the fact that over this time capital city rental rates have increased at a greater average annual rate than capital city property values.

Over the five years to February 2011 capital city rental rates have risen at a faster average annual rate than capital city property values. Both rents and values have climbed much faster than inflation indicating that housing has become more expensive over the past five years, regardless of whether you choose to own or rent.

Over the last five years capital city house values have increased at an average annual rate of 6.2% and unit values at 6.7%. In comparison, rental rates have increased on average by 6.8% for houses and unit rents by 7.5% per annum. The result indicates that growth in house values and rents has been of a similar level however, rental growth for units has well and truly outpaced capital growth.

Over a similar period, December 2005 to December 2010, average end of year inflation has been recorded at 2.9%. The result indicates that housing costs have been increasing at a much faster pace than inflation.

Across the capital cities, capital growth performances have varied significantly during the last five years. Darwin has been the standout performer with property values pretty much consistently increasing until recent months. Over the past five years Darwin house values have increased at an average annual rate of 10.3% and unit values increased by 11.5% per annum. On the other hand, Sydney has been a laggard with house values increasing by 4.1% on average annually and unit values increasing by an average of 5.0% per annum.

As already mentioned, capital city rental growth has been stronger than capital growth over the past five years. Darwin was the best performing city for capital growth and has also recorded the strongest rental growth however, rental prices have failed to keep pace with capital gains. Over the last five years, house and unit rents have both increased at an average annual rate of 10.0%.

The cities and product types which have enjoyed the strongest capital growth have also tended to receive the greatest increases in rental rates. This is indicative of strong demand for housing in these regions over recent years with owners and renters preparing to pay a premium to secure accommodation.

On an annual average basis, rental growth over the past five years has been stronger in Sydney and Perth for both houses and units than the growth in property values. In all other cities average annual growth in property values has been stronger however, in most the differential is quite minor.

RP Data has stated for some time now that we expect that rental growth will accelerate during 2011 as property value growth continues to transition out of the market. As the first graph shows, rental growth has typically been strongest during the past five years during times when property value growth was limited.

Investors and first home buyers are largely remaining out of the market, housing affordability is stretched due to recent value growth, and above average interest rates and construction are likely to be quite weak during 2011. With this in mind, we anticipate that this will lead to increasing upwards pressure on rents through at least 2011. Also rental growth has been sluggish for quite some time and we expect there to be improvements due to owners requiring a superior rental return to that which they are currently receiving.

Tim Lawless is the Director of Property Research at RP Data.