While Melbourne’s rental market was one of the weaker performing of all capital cities in 2021, particularly its inner-city apartment market, there are signs that things could be set to improve in the year ahead. A reduction in rental vacancies and an uplift in the median rental figure point to a recovery ahead, something that will be aided by the resumption of international student travel.
Signs of improvement
Lockdowns, interstate migration and international border closures all amounted to a tough 2021 for Melbourne’s rental market, but 2022 is already showing signs of the situation improving.
In particular, the inner-city apartment market, which suffered the biggest downturn during the pandemic, has been showing signs of revitalisation.
CoreLogic is reporting that unit rents are now growing faster than houses, which did not suffer as much during the pandemic due to an increased desire for space during the work-from-home revolution.
“In Melbourne, where unit rents fell by -8.5 per cent between March 2020 and May 2021, higher density rental markets are now recording a faster rate of growth than houses, with Melbourne unit rents recording a 1.6 per cent quarterly increase compared to the 0.9 per cent rise seen in house rents,” CoreLogic’s research director Tim Lawless said.
Melbourne’s large number of inner-city vacancies, caused in part by the loss of international students during the pandemic, have also been showing signs of improvement.
The number of rental listings available in Melbourne’s inner-city, the worst affected by the rental downturn, also dropped dramatically throughout 2021, according to CoreLogic. In the nine months to October 2021 the number of listings dropped from 9439 to 5074.
Return of students, migration could boost market
International students were allowed to return to Australia in mid-December, and separate data from SQM Research and the Real Estate Institute of Victoria suggests that this has already had an impact on the market. Further positive changes in the year ahead include the resumption of tourism, helping to drive the Melbourne short-term rental market, and a resumption of Australia’s permanent migration program.
In what could bode well for the year ahead, the vacancy rate (houses and units) for the Melbourne market in December 2021 was 4.9 per cent, down from 5 per cent the month prior according to the Real Estate Institute of Victoria.
SQM, which updates rental figures on a rolling basis, reported that in the week ending January 20, 2022 house rents in Melbourne had increased 4.6 per cent on the year prior and units up 0.8 per cent.
It’s also important to note that Melbourne’s 2021 rental market performance wasn’t uniform. Rental values in Mornington Peninsula suburbs grew by as much as 20.2 per cent over the year for houses, while unit rents in the inner suburb of Kensington jumped 9.1 per cent through the year according to CoreLogic.
The long view
Taking a look at the ten-year change in rental rates paints a much more positive picture for Melbourne investors, reinforcing the wisdom that property should not be seen as a short term investment. Melbourne’s rental market may have struggled during the pandemic, but its position as Australia’s second-largest city, with strong inbound migration, meant that rents in the 10 years to October 2021 increased by 23.7 per cent for houses and 13.3 per cent for units.
House rents over the decade increased at a faster pace than in Sydney, Perth, Darwin and Canberra. Unit rental growth was just behind Sydney, at 16.3 per cent, and Canberra, on 13.3 per cent.
Don’t forget capital growth
Cash flow is one aspect of property investment, but capital gains are also a significant part of the equation, particularly considering Australia’s property investment friendly tax scheme.
Despite a choppy rental market, Melbourne apartment values were up 8.7 per cent in the year to January 2022. House values were up a whopping 17.9 per cent.
Experts are predicting that the gap between units and houses will close further too, as those priced out of the housing market will turn their attention to apartments.
“As affordability constraints limit growth in the detached house market and gradually deflect demand towards higher density housing options,” CoreLogic head of research Eliza Owen said.
Major banks are also predicting a rise of between 5 and 8 per cent growth for Melbourne house prices in 2022 - a higher rate than that predicted for Sydney.
Despite a recent rise in interest rates, the cost of a mortgage remains at historically low levels for investors and owner-occupiers. With low rates, property values that look set to continue rising in the short to medium term and an improving rental market, for some buyers 2022 could be the ideal time to invest in the Melbourne market.