Surprise locations where rentals are cheaper

The median rent per week is now $380 in South Australia, up from $330 before the pandemic – that’s the cheapest state to rent in. The ACT is the most expensive place to rent: prices there up from $495 a week to $560.

Rents are pushing up the Consumer Price Index (CPI), and are a big reason the RBA is raising interest rates. The price of rents is one of the most important prices measured by the consumer price index. The RBA wants the CPI rise to be a gentle 2-3 per cent per year, and that is unlikely if rent rises are surging.

But there’s some parts of Australia where rents are still lower than the pandemic: The inner cities of Sydney and Melbourne. That means that in iconic parts of Australia like Kings Cross in Sydney, or Fitzroy in Melbourne renters could be seeing rents that feel cheap. They might be looking at the headlines about rental drama and wondering what all the fuss is about.

Fresh insights

Inside a 12.5km ring around Sydney and Melbourne, most properties are still renting for less than what they cost in 2020, according to never-before-seen data from the Australian Bureau of Statistics. The ABS recently started collecting data from 600,000 rental properties around the country, making sure to get a representative sample. This means we now have information on rental market that we never before had. And it is eye-opening.

We now know, for example, that rents in Victoria have grown far more slowly than in Queensland or WA, so the median rent in both those states is now higher than in Victoria. And we know that inner parts of Melbourne and Sydney have not recovered from the pandemic.

Now, don’t get me wrong: The Sydney and Melbourne inner cities are both seeing prices zoom up. But because prices fell so incredibly far in the pandemic, the recent rises haven’t been large enough to get them back to pre-pandemic levels.

As the next chart shows, the closest areas to the city saw prices collapse most in the pandemic, and haven’t recovered yet. The lines are for areas at different distances from the CBD, and the closest ones are in purple.

The suburbs closest to the city collapsed dramatically in the pandemic, and despite a steep recovery curve, are still cheaper than they were in 2020. Notice that back before the pandemic, rents in Sydney were actually falling for the inner city already, but the opposite was true in Melbourne.

One way to explain the lack of recovery in rental prices is to say prices were unusually high in those areas back in 2020. The very high numbers of international students in particular meant that inner city apartments were in hot demand and cost a fortune.

All the furniture came off those tiny balconies back in early 2020 as international students fled and the city apartment towers emptied out. To get tenants in, landlords cut prices desperately.

Meanwhile, locals were keen on more living space to help them endure lockdowns. They tended to moved from the inner city to the outer suburbs or even out to the beach/mountains. Areas 75-100km from the city centre became very popular. Melbourne’s population actually shrank in the pandemic as people stopped arriving and locals left.

As the chart shows, inner city apartment rents dropped as much as 20 per cent on average. That means some will have dropped even more, creating some screaming bargains. Now when people are looking for a rental property, a little apartment in the city starts to look like a much better deal than a three-bedroom place in the suburbs.

In fact, some inner city apartments are now renting for more than they did in 2018, after a huge price collapse in the pandemic. Check out the crazy price history for this apartment in Elizabeth St, in Melbourne’s CBD:

What happens next?

Of course, inner city rents are rising fast. The question is whether they keep rising much further once they get back to those 2020 levels or if they start to level off.

One factor is the rate at which migrants are arriving in Australia. If people keep coming in, they need somewhere to live, and the inner city will likely become very popular again, bidding rents up. That will create good times for landlords, compensating for the pressure of rising interest rates.

However, more renters and fewer houses available doesn’t have to mean biding wars and people have nowhere to live. Our cities can absorb more people – simply by increasing the number of people per dwelling. Share houses tended to dissolve in the pandemic, and people tried to get themselves a spare room to use as a home office. That caused the average number of people per dwelling to fall. But if rents keep rising young people might decide on getting a new flatmate in, and office workers might decide they are willing to work in the office more instead of at home. (Or don’t care if the background of their zoom call is their bed, and move to a home with no home office!)

It’s not clear if Aussies are willing to give up the extra space we got used to,

The future of rents in the inner cities is going to be determined by how fast migration runs, how fast new apartments can be built, and whether people are willing to share with a flatmate.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.