Rental demand has begun to slow down despite low vacancy rates, experts say

Tenant competition is easing despite vacancy rates across Australia reaching a record low of 0.7 per cent.

The latest Domain Vacancy Rates Report found that the average views per rental listing declined in February and were lower than in previous years.

Vacancy rates indicate how much available rental stock is vacant over a month. Low rates mean there is a low rental supply, creating fierce competition that tends to push prices up.

“While the vacancy rate hits a record low, it’s crucial to consider the bigger rental market picture. The number of prospective tenants per rental listing is easing, indicating falling competition between renters. This supports the trend of slowing rental growth, suggesting demand is pulling back,” says Domain’s chief of research and economics, Dr Nicola Powell.

Powell says the shrinkage of views per listing has been consistent for several months.

“The overall competition between tenants has eased compared to 12 months ago,” she says. “That should logically feed into a higher vacancy rate, but that will take time. This could be an early indicator of an increase in vacancy rates sometime this year.”

LJ Hooker Group’s head of research Matthew Tiller adds that rental demand had moderated slightly compared to 12 months ago, but it’s still relatively high compared to pre-COVID years.

However, Tiller says there has been an increase in investor activity, which may further help vacancy rates.

“From a rental supply point of view of existing homes, there is probably more rental stock in the market at the moment,” he says. “Our LJ Hooker network has seen their property management portfolios increase, meaning there are more investment properties in the pool for tenants to choose from.”

“We’ve seen rental growth outstrip price growth, which means that there are good rental yields on offer at the moment. That’s what has helped drive investor activity over the past and will continue to help drive it forward, particularly when we’ve seen interest rate cuts.”

Tiller believes the pre-COVID rental market balance is still a long way away, and it could take anywhere from 12 to 18 months before there is an equilibrium.

Powell says a balanced rental market has around 2 to 3 per cent vacancy rates. A handful of SA3 regions across the capital cities are in that equilibrium state or are close to it.

“When you get down to the different locations on that smaller level, we’ve definitely got a diversity of rental conditions. Some areas offer better prospects for tenants than others,” she says.

Domain’s Vacancy Rates Report highlighted SA3 regions with the highest vacancy rates across several capital cities, with some regions having rates as high as 2.9 per cent.

In Sydney, the semi-rural area of Dural – Wiseman Ferry has a vacancy rate of 2.9 per cent (the highest in the nation), followed by the Rouse Hill – McGraths Hill area, which has a vacancy rate of 2.6 per cent.

Local agent Daniel Hall of Guardian Realty says the Dural SA3 region has fewer people looking to rent than other parts of Sydney because it’s far away.

Despite this, he says the rental market is “pretty solid.”

“It has its low moments, but I don’t really struggle too much to move things,” Hall says. “[Rental properties] go in about a week or so.”

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In Melbourne, Melbourne City has the highest vacancy rate, at 1.8 per cent, followed by the Melton – Bacchus Marsh area, at 1.7 per cent.

Powell says each region has different dynamics across the rental market, and by hopping over to a nearby suburb, one could see improvement due to things like higher levels of development or property density.

She says Melbourne City is an example of this, where many dwellings are rented.

“For a city like Melbourne, having a 1.8 per cent vacancy rate is definitely positive. And its vacancy rate is higher than last year,” she says.

Melbourne-based real estate agent, Kim Te of Motion Property, says vacancy rates fluctuate due to the university semester as students return or leave school. When school is in recess, there is less demand for dwellings than when the new term is about to begin.

He says another attribute to the 1.8 per cent vacancy rate is price.

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“It’s getting a lot more expensive,” Te says. “People are wanting to vacate and move outwards to find something more affordable in price.”

Te believes that as more investors return to the market, tenants will have more options, which will also increase the vacancy rates.

Brisbane’s SA3 region of Kenmore – Brookfield – Moggill has the highest vacancy rate at 2.1 per cent, followed by Jimboomba at 1.8 per cent.

Perth and Adelaide have some of the tightest rental markets in the nation. Adelaide’s highest vacancy rate is just 0.7 per cent in the SA3 region of Adelaide City. Similarly, Perth’s region of Mandurah has the highest vacancy rate, with just 0.7 per cent.

Raine & Horne Mandurah principal and licensee Peter Vetten says it’s common to see crowds of up to 60 people attending a rental inspection.

“Within three or four days, we get at least a dozen applications,” he says.

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Powell finds the tight rental markets in Perth and Adelaide “really concerning.” She says the best way to improve the situation for tenants is to increase supply to meet demand, which is easier said than done.

However, she says rental conditions are changing to favour tenants at smaller geographic levels, but it’ll still be a long while before it’s felt at a more national level.