What’s going on?

Time has been hard to mark over the last couple of years. Everything feels like it’s morphed into an endless loop. Was it really two years ago we saw the rental market in freefall because of Covid lockdowns? So, if not much has changed since then how is it that we are now looking at the tightest rental market I’ve ever seen?

Here’s my take on what I’m seeing now and what’s happened over the last couple of years. Yes, it does all come down to the fundamental principle of supply and demand.

The pandemic moved demand out of the market. International migration and international student numbers were cut, and we also saw a large proportion of renters choose to move back in with family because of financial insecurity.

I should highlight that during that first year of Covid our team were still able to lease properties. Demand was slower but it was still there and returns were certainly not as strong. That’s a clear indication that supply remained a factor in what could have been the darkest of periods for landlords.

Now international students are coming back and many of those people who moved home are feeling more confident so looking to find their own place again. Demand is growing.

But can those factors really account for the extraordinarily low vacancy rate of just 2.2% that we have in Sydney in March? I think not. So, what else is going on?

There’s the fact that during the uncertainty of Covid landlords were motivated to retain quality tenants. Agreements were renegotiated and now those tenants on a comparatively good rental deal are understandably reluctant to move. That means there’s less turnover.

Then there’s the extraordinary strength we have seen in the property market. This is a big one.

Investors saw an opportunity to take advantage of the 20+% value growth in Sydney residential property prices and sold their properties. A majority of those who purchased were owner-occupiers. The raging selling market and lower rental returns delivered by Covid circumstances made property less attractive for investors.

The result is less supply for renters.

Supply has absolutely been an issue for decades. I can remember repeatedly writing blogs trying to counter speculation that the development and building boom specifically for Sydney apartments was dangerous. The team at Morton are specialists in leasing new developments and we have seen a consistent level of demand to absorb that new stock.

The circumstances of immigration, value growth, Covid uncertainty and the financial market conditions have contributed to the perfect storm that is the current incredibly tight rental market.

Looking ahead I anticipate the prospect of tighter financial conditions will see value growth continue to ease which, together with the increase in rental returns, will motivate investors to return to the market. That will increase rental supply but I’m afraid I don’t see any immediate turnaround in the extraordinarily tight market we are experiencing.

Posted in Ewan's Blog on 14th April, 2022