The Australian rental market is regaining momentum due to a persistent supply deficit.

Demand constraints have increased rent rise in Australia, where vacancy rates have decreased to almost record low levels of 1.1% in the first three months of 2023.

According to Core Logic.

Rents are at an all-time low.

The total number of rental postings nationwide dropped to just under 95,000 for the four weeks leading up to April 2; this was -17.3% lower than the levels seen during the same time in 2022 and -36.3% lower than the prior five-year average.

The lack of rental listings, coupled with the highest rate of immigration from abroad since COVID's inception, has caused the national vacancy rate to once again tighten, reaching a new record low of 1.0% in February before edging slightly higher to 1.1% in March, down from 1.3% in December. In March, the combined capitals' vacancy rate reached a new low of 0.9%, while it increased to 1.4% in regional Australia.

House rent growth is outpacing that of units.

The surge in rentals in the unit market, notably across the main capitals, with rising demand from overseas migration occurring despite a dearth of rental availability, is what is responsible for the spike in rental growth, she added.

Unit rentals increased 3.9% nationally for the quarter, up from 2.8% in the December quarter. With affordability concerns presumably driving more tenants towards the medium to high-density sector, national home rentals saw a modest increase, from 1.7% to 2.0%.

The medium to high-density sector saw similar rental growth circumstances throughout the capitals, with each city seeing a greater quarterly and yearly increase in unit rentals compared to homes.

Higher rents in the capital than in nearby cities.

The combined capitals rental growth surpassed the combined regional markets, extending a pattern that began in June 2022. The combined rents in capital cities increased by 3.0% over the three months ending in March, which was more than twice as fast as the combined rents in regional cities (1.2%).

While the resumption of international migration has helped the capital city rental trend reaccelerate, higher growth during the initial stages of COVID has seen regional rents climb by 28.2% since the start of COVID in March 2020, whereas capital city rentals have increased by 23.0%.

Melbourne (3.7%), Perth (3.6%), Sydney (3.4%), Hobart (1.8%), and Adelaide (1.7%) had the highest quarterly rental increases. Brisbane's rental growth slowed during the quarter, going from 2.2% in December to 1.8% in March, while rentals fell in Darwin (-1.0%) and Canberra (-0.7%).

Rents in Melbourne are raised by immigrants.

Melbourne maintained its title as the nation's most inexpensive capital, with a median rental value of $526 per week, despite experiencing the biggest quarterly rental rise.

Weaker rental demand owing to prolonged lockdowns and blocked foreign borders saw Melbourne's relative rental affordability increase.

Yet, the pendulum had swung the other way since returning foreign workers and students, who normally chose to rent in Melbourne or Sydney, had returned. According to this pattern, the difference between Melbourne and Adelaide ($531), the second-most cheap rental capital, has shrunk from $15 per week in December to barely $5 per week in March.

Sydney reclaims the title of most expensive.

In the March quarter, Sydney ($699 per week) surpassed Canberra ($674 per week) as the most expensive capital to rent in, with Canberra's rentals down by -0.7% over the three months leading up to March.

Sydney's quarterly rental trend picked up steam, rising from 2.8% during the December quarter to 3.4% in March. This was Sydney's greatest quarterly increase since the three months ending in April 2010, as well as its highest yearly increase (12.6%), since CoreLogic records have been kept in 2006.

Perth's yearly numbers are the highest.

Perth had the highest annual rent rise of any capital city, rising 12.8% over the previous year to March, or $65 per week, and was followed by Sydney (12.6%) and Brisbane (12.3%). The smallest yearly rent rise was in Canberra, up just 0.3%, while annual hikes in Darwin and Hobart were 4.6% and 4.7%, respectively.

Local rental markets all see growth.

Rents increased throughout the quarter in each of the major rest-of-state regions, but at varying rates. In the three months leading up to March, regional SA saw the biggest increase in rent, up 2.3%, followed by regional WA (up 2.2%), regional QLD (up 1.4%), and rural Victoria (up 1.2%). Tasmania's regional rent increased by just 0.1%, whereas rents in regional NSW and NT increased by 0.7% and 0.9%, respectively.

Gross rental yields increase.

Gross rental yields nationwide increased by 10 basis points from the March quarter to 3.88%. Except for regional NT, each capital and rest-of-state area had an increase in gross rental yields both quarterly and annually.

The rate of yield recovery has moderated from the 24-basis point boost observed over the three months to September 2022, albeit it is still positive.

The yield recovery period to date has been driven by both declining values and rising rents after yields hit a record low in February 2022 (3.21%). Nonetheless, the increasing trend in rates will probably continue to moderate given that the CoreLogic national House Value Index showed an increase in housing values over March (0.6%).

More rental pressure is anticipated.

Given the imbalance between supply and demand, it is doubtful that tenants would get any respite in the short to medium term. Stock levels are also unlikely to rise much any time soon, and there are little financial incentives for investors to enter the market.

Although gross yields have increased year over year, nett yields are probably down. The average weekly investor mortgage repayment on a typical Australian home climbed by $184, leaving investors $136 per week worse off, she said. Weekly rentals soared by almost $48 per week between April 2022 and March 2023.

In addition, nett migration is expected to continue to be robust for a while, which will just put more upward pressure on rental values.

Unlike property owners, tenants facing affordability issues have few options and cannot borrow money to pay their rent. It's possible that some renters are now forgoing their spare room or home office in favour of reuniting the share homes that split apart across COVID to split the cost of rent.

As some sign lengthier leases rather than risk the search for a new apartment, those who can afford to put down a deposit may be making the leap into homeownership sooner.