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• Previous work has identified rents as a key component to watch in the CPI. They historically have been sensitive to labour market conditions as well as the housing cycle and a key barometer of core inflationary pressures.  During the height of the pandemic, rents fell from negotiated rent decreases, many temporary relief measures, and it is unclear how much signal we will be able to take from a likely rebound in rents. In this weekly, we look at population dynamics over the COVID period and assess their implications for the outlook for rents.
• Rents in the CPI reflect only capital cities and are dominated by Sydney and Melbourne, together accounting for over two-thirds of the rents in the CPI basket. Within these cities, two thirds of rentals are houses, and a third of rental properties are units. The experience of these cities is quite different to the rest of Australia, with closed borders likely to weigh on rents:
  • Population growth in these cities was driven by net overseas migration, but that turned negative during the pandemic. In addition, Melbourne saw large net outflows from interstate migration as arrivals from other states slowed dramatically during the second lockdown.
  • These dynamics have been reflected in vacancy rates and rental prices.  Unit rents continue to weigh, especially in Melbourne, while house rents have lagged broader increases. Closed borders will weigh on rents in these cities.
  • It’s still unclear how movements within states will play out: will migration out of cities ease or reverse as life returns closer to “normal”, as localised lockdowns become rarer, rebalancing rental demand back towards cities and ease pressure in regional rental markets. Targeted rent reductions at the onset of the pandemic are also likely to continue to revert to current market rates.
• In the medium term, labour market conditions, household incomes, and the supply/demand dynamics in housing are key drivers of rent inflation. While rents will remain a cyclical barometer and driver of inflation, a rebound from pandemic impacts alone would not be a signal of broader inflationary pressure. Recent growth in rents suggests some strengthening in rents inflation in coming quarters, however, vacancy rates remain high in inner cities, especially Melbourne and Sydney, and are unlikely to tighten materially until international borders are re-opened, pencilled in early 2022.

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