PMI Residential Rental Outlook
Australia July 2008
This report is produced by PMI in conjunction with BIS Shrapnel.
In this Report Overview Rental household profile Rental affordability Impact on prices Tables 1. Dwelling demand, supply, vacancy rates and rental growth 2. Household type (rental households) 3. Change in median household income 4. Household type (rental households) 5. Rental affordability 6. Potential rental growth 7. Rental affordability versus mortgage affordability
2 3 5 7 2 3 4 4 5 6 7
PMI Residential Rental Outlook
The increased demand for rental dwelling accommodation has seen the rental markets nationally tighten considerably over the last 18 months, with significant rental growths now emerging in all capital cities
Overview
After peaking at 174,000 in 2003/04, new dwelling commencements have slowly declined to an estimated 157,000 in 2007/08, hampered by rising prices and declines in affordability due to a rising interest rate environment. At the same time, net overseas migration inflows and population growth will reach record levels in 2007/08. The increased demand for dwelling accommodation as a result has seen the national rental markets tighten considerably over the last 18 months, with significant rental growth now emerging in all capital cities. Table 1 briefly summarises dwelling demand and supply, along with vacancy rates and recent rental performance. The table highlights that, with the exception of South Australia and Tasmania, all of the states will build fewer new dwellings than will be required, as indicated by the underlying demand for dwellings. Table 1: Dwelling demand, supply, vacancy rates and rental growth State Annual demand for dwellings, 2008-2013 48,400 45,700 46,000 11,300 24,000 2,300 1,600 2,450 Estimated supply of dwellings, 2007-2008 33,450 42,800 43,950 12,150 21,300 2,500 1,450 2,400 Capital City Vacancy rate (%), Increase in rents, as at March 2008 2001-2007 (% per annum) 1.0 1.6 1.8 1.1 1.6 2.2 2.6 2.1 2.1 2.2 4.6 3.3 3.7 4.1 3.1 4.9 Increase in rents, year to March 2008 (%) 6.0 5.6 9.0 5.1 12.1 4.9 8.6 7.5 At the same time, the vacancy rate in each of the capital city markets is well below what is considered to be the “balanced market” rate of 3%—i.e. where rental growth is likely to move in line with inflation. This is highlighted by the magnitude of rental growth in the last 12 months to March 2008, which has been significantly stronger than the average annual growth since 2001. With new dwelling supply remaining below the level of demand for new dwellings, continued pressure is expected on the already tight rental markets fuelling further strong rental growth. This paper seeks to take a closer look at the rental market and the capacity for tenants to absorb further significant rental rises—i.e. how much further can rental price growth go, and what will be the effect of strong rises in rents on house prices?
NSW VIC QLD SA WA TAS NT ACT
Source: Australian Bureau of Statistics/ BIS Shrapnel
2
Rental household profile
Table 2 shows the profile of rental households compared to the profile of total households nationally. The table highlights that rental households contain a greater proportion of single parent family households (13.9% compared to 6.8%), lone person households (33.4% compared to 25.7%), and group households (7.9% compared to 3.0%). This would be expected, as these types of households are more likely to have a lower income, and therefore less able to afford owner occupation.
Table 2: Household type: Rental households, 2005/06 Household type % Couple with dependent children One parent family with dependent children Couple only Other one family households Multiple family households Lone persons Group households Total
Source: Australian Bureau of Statistics Cat 4130.0.55.001
Renters Number (‘000) 409.2 314.3 375.3 208.0 20.3 755.2 178.6 2,261.0 % 26.2 6.8 25.8 11.5 1.0 25.7 3.0 100.0
Total Number (‘000) 1,998.1 518.6 1,967.6 877.0 76.3 1,959.9 228.8 7,626.2
18.1 13.9 16.6 9.2 0.9 33.4 7.9 100.0
Nevertheless, there are groups of households who rent by choice, and it appears that this may become increasingly the case. This is highlighted in Table 3, which shows the growth in the median household income of rental households versus total household income growth between the 2001 and 2006 Censuses. Table 3 indicates that median household income in rental households generally increased at a greater rate than the median for total households between 2001 and 2006.
This would suggest that higher income groups have increasingly opted for rental over owner occupation. In contrast, income growth in rental households between 2001 and 2006 was lower than total household income growth in Sydney and Hobart. With Sydney being the least affordable residential market in Australia, this would suggest that more people at the lower end of the income scale were increasingly forced into rental rather than owner occupation over 2001 to 2006.
There are groups of households who rent by choice, and it appears that this may become increasingly the case
3
The majority of rental households actually occupy more space than they need in the dwelling
Table 3: Change in median household income ($ per week): Rental households versus total households, 2001 and 2006 City 2001 Rental households 2006 Average annual (%) 6.8 8.3 11.0 10.8 12.8 10.6 9.2 10.2 2001 Total households 2006 Average annual (%) 7.5 7.7 9.7 10.2 10.6 10.7 9.0 9.9
Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra
796 709 635 487 563 467 793 796
1,104 1,057 1,068 812 1,029 775 1,231 1,296
989 889 827 709 807 678 1,018 1,135
1,418 1,288 1,316 1,155 1,334 1,129 1,563 1,820
Source: Australian Bureau of Statistics/ BIS Shrapnel
Interestingly, Table 4 also highlights that the majority of rental households actually occupy more space than they need in the dwelling. Around 65% of rental households have indicated that they have at least one spare bedroom, as indicated by the Housing Occupancy and Costs survey by the Australian Bureau of Statistics in 2005/06. In the next section, we highlight that rents in 2006 were relatively more affordable than in 2001, and it could be that the
lower relative rental costs over this period allowed tenants to take up more space than they would otherwise have required. Going forward, this also suggests that there is scope for greater rises in rents, as tenants either have the potential to take in boarders to assist with the higher rents or move to smaller dwellings for the same amount as they are priced out of larger dwellings.
Table 4: Household type: Private rental households, 2005/06 Dwelling utilisation 2 or more bedrooms needed 1 more bedroom needed No extra bedrooms needed 1 bedroom spare 2 bedrooms spare 3 bedrooms spare Total
Source: Australian Bureau of Statistics Cat 4130.0.55.001
% of rental households 0.4 4.4 29.7 42.6 19.3 3.6 100.0
Around 65% of rental households have indicated that they have at least one spare bedroom
4
Rental Affordability
Table 5 highlights median weekly rents and median household income for rental households at the 2001 Census, the 2006 Census, and an estimate at 2008, based on increases in household income and capital city rents per Australian Bureau of Statistics data. A measure of rental affordability is also highlighted, showing rental payments as a percentage of rental household income. The table shows that, with the exception of Canberra, a lower percentage of household income was attributable to rent at the 2006 Census than at the 2001 Census. That is, rents at 2006 levels were more affordable in 2006 than in 2001. Extending this ratio to 2008 highlights that, despite the strong increase in rents over the past twelve months, there have been equally strong rises in income, with median rental levels remaining at a similar proportion of median household income as 2006 levels—i.e. rents continue to remain at more affordable levels than in 2001. This would suggest that there is scope for rental growth over and above income growth going forward from an affordability perspective, particularly given the potential for rises due to the tightness of vacancy rates.
Table 5: Rental affordability: Weekly rents as a proportion of weekly income, rental households City Rent ($ p.w.) Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra City Rent ($ p.w.) Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra 302 251 286 199 250 188 259 318 220 173 161 126 141 116 164 171 2001 Census Income ($ p.w.) 796 709 635 487 563 467 793 796 June 2008 (estimate) Income ($ p.w.) 1,235 1,179 1,213 908 1,195 867 1,430 1,449 Rent as a % of income 24.5 21.3 23.5 22.0 20.0 21.6 18.1 22.0 Rent as % of income 27.6 24.3 25.3 25.9 25.0 24.7 20.6 21.5 Rent ($ p.w.) 274 229 247 183 205 170 222 282 2006 Census Income ($ p.w.) 1,104 1,057 1,068 812 1,029 775 1,231 1,296 Rent as % of income 24.8 21.7 23.1 22.6 19.9 21.9 18.0 21.8
Source: Australian Bureau of Statistics/ BIS Shrapnel
5
It is anticipated that the current tightness in vacancy rates will remain through to at least 2011, as supply struggles to increase to a level commensurate with demand
Table 6 shows potential rental growth based on BIS Shrapnel’s forecasts of household income growth for rental households from 2008 to 2011. Given that recent rises in interest rates are expected to constrain new dwelling construction in the short term, This is expected to drive strong rental growth in this period. Assuming the rent/income affordability measure of the 2001 Census is a benchmark for the limits of rental affordability, the table suggests that there is potential for further strong growth in rents from an affordability perspective. While Canberra is expected to be able to support only 4.2% growth per annum over the three years to 2011, expected income growth in the Adelaide and Perth markets has the potential to support rises of over 11% per annum. In comparison, Brisbane has the potential to support increases of 7.5% per annum, while Sydney, Melbourne, Hobart, and Darwin are expected to be able to support 9%–10% increases in rent per annum over the next three years. This is significantly higher than the levels seen since 2001.
Table 6: Potential rental growth, 2008 - 2011 City Rent ($ p.w.) Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra City Rent ($ p.w.) Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra 395 329 355 272 346 249 342 361 302 251 286 199 250 188 259 318 2008 (estimate) Income ($ p.w.) 1,235 1,179 1,213 908 1,195 867 1,430 1,449 2011 (at 2001 ratios) Income ($ p.w.) 1,431 1,352 1,400 1,053 1,382 1,005 1,654 1,680 Rent as % of income 24.5 21.3 23.5 22.0 20.9 21.6 18.1 22.0 Rent ($ p.w.) 350 288 329 231 289 217 299 369 2011 (at 2006 ratios) Income ($ p.w.) 1,431 1,352 1,400 1,053 1,382 1,005 1,654 1,680 Rent as % of income 24.5 21.3 23.5 22.0 20.9 21.6 18.1 22.0
Potential Rental Income Rent as a % of % p.a. income 2008-2011 27.6 24.3 25.3 25.9 25.0 24.7 20.6 21.5 9.4 9.4 7.5 11.0 11.4 9.9 9.7 4.2
Source: Australian Bureau of Statistics/ BIS Shrapnel
6
Impact on Prices
Table 7 highlights a comparison between rental affordability (rent as a percentage of rental household income) and mortgage affordability (mortgage repayments as a percentage of mortgaged households income) at the 2001 and 2006 Censuses, and an estimate for 2011, based on forecast income and interest rates at that time, and assuming static dwelling prices. The comparison is made to help determine whether sizeable growth in rents will ultimately have an impact on dwelling price growth. The table indicates that, with the exception of Darwin, owner occupation was more affordable in 2001 relative to 2006, as highlighted by the diminished size of the gap between the mortgage affordability percentage and rental affordability percentage in 2006 compared to 2001. For example, in Sydney, a rental household spent 27.6% of its income on rent in 2001, while a mortgaged household spent 19.7% of its income on housing loan repayments. By 2006, this gap had narrowed with the mortgage affordability measure deteriorating to 23.5%, while the rental affordability measure improved to 24.8%. This partly explains the reason for the upturn in Sydney prices after 2001, as owner occupation was significantly more attractive relative to where it had moved by 2006. Similar trends were apparent in the other capital cities. With prices in most capital cities having risen between 2006 and 2008, and mortgage interest rates also higher, the gap between rental affordability and mortgage affordability would have narrowed even further, continuing to make rental a more attractive option. Going forward, however, the likely effect on residential prices can be seen if continued strong rental growth takes rental affordability back to 2001 levels. The table shows where mortgage affordability is likely to be by 2011 assuming forecast interest rates at the time but no growth in prices. Although solid income growth would mean that mortgage affordability is expected to improve from 2006 to 2011, increased interest rates will also offset some of this improvement. Nevertheless, between 2006 and 2011, the affordability gap between rental and mortgage households is expected to again widen, although generally not quite back to 2001 levels, indicating an improvement in owner occupation relative to rental. Moreover, with the exception of Sydney, the gap will be considerably larger than at 2006. This suggests that there is potential for higher price levels by 2011 in most markets on the basis that rising rents will make owner occupation a preferred option for some, as was evident prior to the previous upturn in 2001. This would particularly be the case in Perth and Darwin, where if prices were unchanged, the affordability gap by 2011 could be larger than in 2001, and perhaps least so in Sydney, where the gap at current prices is the smallest.
Table 7: Rental affordability versus mortgage affordability, 2001 - 2011 City 2001 Census 2006 Census 2011 (estimate) Rent as % of income 27.6 24.3 25.3 25.9 25.0 24.7 20.6 21.5 Mortgage as a % of income 23.1 19.5 18.1 16.8 16.9 15.9 15.9 15.5 Rent as a % of Mortgage as a Rent as a % of Mortgage as a income % of income income % of income Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra 27.6 24.3 25.3 25.9 25.0 24.7 20.6 21.5 19.7 17.3 17.0 15.8 17.7 15.2 17.6 15.1 24.8 21.7 23.1 22.6 19.9 21.9 18.0 21.8 23.5 19.5 18.5 17.1 17.7 16.1 16.7 15.8
Source: Australian Bureau of Statistics/ BIS Shrapnel
7
Disclaimer
The information contained in this publication is provided for information purposes only and is not intended to constitute legal, financial or other professional advice and has not been provided with regard to the investment objectives or circumstances of any particular reader. While based on information believed to be reliable, no guarantee is given that it is accurate or complete and no warranties are made by PMI Mortgage Insurance Ltd (“PMI”) as to the accuracy, completeness or usefulness of any of the information in this publication. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) (if any) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The information referred to may not be suitable for the specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgement. Recipients should obtain their own appropriate professional advice. Neither PMI nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. PMI owns copyright in this material. This material may not be reproduced, redistributed, or copied in whole or in part for any purpose without PMI’s prior authorised written consent.
www.pmigroup.com.au
AUSTRALIA
SYDNEY Level 21, AMP Centre 50 Bridge Street Sydney NSW 2000 PO Box R1547 Royal Exchange NSW 1225 PH 61 (02) 9231 7777 FAX 61 (02) 9251 5550 BRISBANE Level 1, 12 Creek Street Brisbane QLD 4000 GPO Box 1278 Brisbane QLD 4001 PH 61 (07) 3292 1700 FAX 61 (07) 3221 0200 MELBOURNE Level 34, 385 Bourke Street Melbourne VIC 3000 GPO Box 2966 Melbourne VIC 3001 PH 61 (03) 9607 9777 FAX 61 (03) 9670 5179 ADELAIDE Level 1, 70 Pirie Street Adelaide SA 5000 GPO Box 2404 Adelaide SA 5001 PH 61 (08) 8359 3270 FAX 61 (08) 8359 3290 PERTH Level 3, 89 St Georges Terrace Perth WA 6000 PH 61 (08) 9211 5900 FAX 61 (08) 9481 6045 1300 FOR PMI (367 764) WWW.PMIGROUP.COM.AU