Why rents will keep rising: Tim Lawless

Rental rates across the combined capital cities grew by 6.3% in 2011, compared with a fall in home values of 3.6%. The superior growth performance of rents compared with values has been a consistent trend over the past five years.

Since the beginning of 2006, rental growth across the combined capital cities has outpaced the growth in home values. Over the period December 2005 to December 2011, capital city home values have increased by a total of 34.5% compared to rental rates having increased by a total of 46.8%. On an inflation adjusted basis, capital city home values have increased by 15.4% over the period and rental rates have increased by 27.7%.

Looking at the performance across individual years highlights the fact that you typically see either rents or values growing or in some instances both. Across each year highlighted, one of either values or rents has grown by more than 5%. The results also highlight that if value or rental growth slows, typically the other will increase; the markets tend to be counter-cyclical.

The results are also indicative of a disconnect between housing demand and housing supply given that in any given year values or rents are growing at a rate that is in excess of the growth in inflation.

Across individual capital cities over the five years to December 2011, house values have grown by as little as an average annual rate of 0.1% in Perth and by as much as 7.9% per year in Darwin. Across the combined capital cities, house values have increased at an average annual rate of 4.4% over the last five years.

In comparison, house rents have recorded average annual growth of as little as 2.8% per year in Adelaide and as much as 9.9% annually in Darwin. Across the combined capital cities, rental rates for houses have increased at an average annual rate of 5.8% pear year over the last five years, a full 1.4 percentage points higher than average annual value growth.

Focusing on units, they have enjoyed stronger value growth over the past five years than houses. Across the combined capital cities unit values have increased at an average annual rate of 5.5% per year over the period and have increased by as much as 12.5% per year in Darwin and by as little as 0.9% per year in Perth.

Rental growth for units has outpaced the growth in the value of units over the last five years. Unit rents have increased at an average annual rate of 6.2% annually over the past five years and have increased by as much as 11.9% per year in Darwin and by as little 3.1% per year in Canberra.

The average annual rate of rental growth for houses has outpaced that of units over the past five years in each city except Melbourne, Adelaide and Canberra. Duringthe same timeframe, rental growth for units has outpaced value growth in Sydney, Brisbane and Perth.

Over 2012, RP Data expects that growth in rental rates will continue to outpace the growth in home values. The reason being that we are not anticipating any 'real' growth in home values. Additionally, tight rental market conditions accompanied by an insufficient supply of new housing is likely to result in superior levels of rental growth to that of home values.

As always, there is likely to be some disparity between rental growth across individual capital cities. Markets such as Sydney, Brisbane and Perth are anticipated to be the strongest performers for rental growth due to the large discrepancy between housing supply and demand and low rental vacancy rates. On the other hand, rental pressures are not expected to be anywhere near as strong in Melbourne and Adelaide due to higher rental vacancy rates and less of a disparity between housing demand and housing supply.

Tim Lawless is the director of research at RP Data

This article originally appeared on SmartCompany.