The latest CPI data showed that inflation increased by 1.8% through the June quarter, and 6.1% through the past year.
And housing was one of the key contributors to the latest CPI reading (alongside transport and household goods), growing 9.0% through the year to June. A key driver behind the growth was the jump in new dwelling prices, growing by a super-sized 20.3%. In this context, the cost of building has been pushed up by shortages of building supplies and labour, as well as elevated freight costs.
In comparison, the rent component of the CPI has remained muted, growing only 1.6% through the year across the country. That said, there are early signs that rents are starting to lift, with Sydney and Melbourne recording rent price rises in two consecutive quarters.
But as prices across the broader economy are up sharply, the Reserve Bank has continued to raise the cash rate, and last week lifting the rate to 1.85%.
These interest rate rises have already started to create headwinds across Australia’s property market. According to CoreLogic’s recent Hedonic Home Value Index Report, dwelling values in Australia in the three months to July 31 have fallen 2.0%, with the majority of capital cities experiencing declines. Regional dwelling prices have also started to fall, after rising 41% from the pandemic trough to June this year.
The slowdown in prices has been more substantial across houses rather than units, with house prices across the country falling 2.2% through the quarter, in comparison to the 1.4% for units.
Chart: House and unit price growth to July 31, 2022
Source: CoreLogic
By contrast, the report shows rents are starting to move sharply higher as property prices take a hit. Through the quarter to July, rents increased by 2.8% across Australia, or 9.8% over the past twelve months. The trend of rising rents was apparent across all capital cities and strongest in Brisbane, which saw rents rising 4.2% over the quarter to July. Note, the difference between these results and the CPI rent measure is that the latter covers all rents, most of which are on fixed terms and haven’t come up for re-negotiation. CoreLogic’s data is at the margin based on properties being advertised now, providing a better signal for where broader rental costs may head.
The rise in rental prices in recent months has been largely led by a significant decline in rental listings leading to historically low vacancy rates. Some would-be rental properties may have been taken off the market for owners to live in (sometimes as a second residence in regional areas). Additionally, affordability constraints are impacting some tenants, with demand for unit rentals outpacing the demand for houses.
And with rents rising and values starting to cool off, rental yields are picking up, especially in the regions. Regional rent prices across the country have grown 10.5% in the year to July, relatively higher than the combined capitals rate of 9.5%. As a result, rental yields in the regions (4.1% yield) have exceeded the capitals (3.2%) over the past year. These trends may start to encourage some investors back into the property market, even in the face of rising interest rates.