Rental markets across the capital cities can be split into two broad categories - those where rents are increasing and those where rents are flat. In one camp are those cities where vacancy rates remain low while rental demand is high - consequently, rents rise. In the other camp, vacancy rates and rental demand aren't as tight, creating little upwards pressure on rents.
The good news for Sydney landlords (or bad news for Sydney renters) is that rents are heading north. Over the past year we have seen Sydney rents increase by 5.9 per cent for houses and 5.4 per cent for units. That brings the weekly rent for a typical Sydney house up to $550 and to $513 for units.
The other cities with solid rental growth are Brisbane and Perth, where house rents are up 4.8 per cent and 10.1 per cent respectively and unit rents are up 8.4 per cent and 6.8 per cent over the year.
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Contrast that with Melbourne, where the weekly rent on a house has increased by just 1.9 per cent over the past year and unit rents have remained absolutely flat.
The common denominator across Sydney, Brisbane and Perth's strong rental conditions is that new housing supply has been insufficient relative to population growth. The number of dwellings that commenced construction across NSW during the June quarter was just 6696. Compare that with Victoria, where housing demand is virtually the same as NSW. In Victoria there were 14,684 dwelling starts - more than double NSW.
Dwelling commencements were 25 per cent lower than the decade average in NSW. In Queensland, the number of new homes that started construction in June was 34 per cent below the long-term average and in Western Australia new dwelling starts were 13 per cent below average. Conversely in Victoria, new home starts were 30 per cent higher than the long-term average.
With the Sydney housing market clearly under-supplied we have seen rental vacancy rates reportedly fall below 1.5 per cent and the upwards pressure on rents is likely to persist. This is compounded by the fact first-home buyers represent a fairly small proportion of the market.
Fewer first-home buyers roughly translates to higher rental demand. As rents rise at a faster pace than home values (Sydney home values are down 1.2 per cent over the 12 months to September) we are seeing rental yields also improving.
The typical Sydney house is now returning 4.4 per cent gross, while units are returning a gross yield of 5.2 per cent. Both are well above the combined capital-city average. While above average, most investors would be seeking higher yields, particularly with capital gains likely to remain flat to negative for some time.
Investors seeking to maximise their rental return are advised to buy where rental demand is likely to be the highest and supply constraints are evident. Established suburbs close to major working nodes are generally a safe bet, as are suburbs close to universities and major public transport hubs.