What is causing increased rental demand in Sydney and Melbourne (if it is)?

What is causing the increased rental demand in Sydney and Melbourne (and therefore higher rent), if any? This question has been a bit puzzling so I thought of seeking some opinions and wisdom. See below my thoughts about the events which may have played some role in shaping the rental market what it is today.

1) In the last two years, there has hardly been any net new permanent immigration. A tiny number of people arrived on work visa, student visa or holiday working visa. All in all, there was a bit of a void in incoming/ new population except that some Aussie expats may have returned back but recently some may have also left Australia for the greener pastures.

2) On the other hand, a very high number of H&L packages have been sold in major cities and typically the first home buyers (who were renting prior) would move there, at least initially. I am not sure what % of those have already been built so far on average but I would assume that a lot of them would be half-way through or near completion. It means that the buyers of these houses who were renting somewhere would vacate their apartments/ houses and move to their own houses in the new estates/ suburbs.

3) There was already an oversupply of apartments in several suburbs in Sydney and Melbourne even before 2020. Many more apartment projects have been in pipeline since then and, although slow for apparent reasons, some of these would have been built and delivered in the last two years, adding some more supply to the market.

4) With increasing Work From Home options, studios are probably not the best suited for a couple where both people are working from home. For reasons like this, a general preference will be for a bigger space across all budget categories. However, by that logic there should also be an oversupply of studios or 1-Bedders, resulting in net zero change in overall rental demand across a city (a simplistic assumption).

Considering all above (possible) reasons, I cannot understand why there should be any shortage of rental supply in Sydney and Melbourne, causing increase of rents in some pockets. There has been no event that explains the demand outstripping supply of rental housing in these cities. Well, things could possibly change over the next 2-3 years if immigration really picks up and construction activity's speed can't match the demand but my question is more about the current times where immigration hasn't even started with any significant pace. My logic is simple - if people buy their own or move somewhere else, they vacate the existing place, resulting in zero change in national rental demand. That's what most of Aussies have been doing. Sure, more people moved to regionals than those moved to cities but why should Sydney and Melbourne face rental shortage in that case? If anything, it should be the reverse.

 

It’s all expats that have returned home plus the space that is available is being used less efficiently.

For instance a couple wanting a 1 bedder typically are demanding a 2 bedder for WFH.

 

• Students are back...perhaps 70%
• some returning expats have chosen to stay (for now)
• lower supply of new apartments and fewer buyers. Don't think the Chinese are buying anything.
• people seeking more space - so going for properties with extra bedrooms. That explains why the unit market is not under pressure like houses. Evolving situation though.
• some of those who fled for the hills during the pandemic are back in the cities. Quite a number of companies are now demanding 2-4 days in the office. As long as they want you back even once a week, living in say, the Central Coast gets old real quick.
• Immigrants trickling back. Assume this will ramp up throughout the year.
• Australia potentially becoming a more attractive country to migrate to given global instability....Ukraine, Taiwan, HK etc.

 

With these reasons, apartments' prices should have tanked visibly but they seem to be doing ok as well.

 

- Marriage breakdowns turning 1 household into 2 is a big one (half my rental applications for a vacant IP were newly separated)

- Also a backlog of teenagers/early 20 year olds who would've made the natural move out of home in the last 2 years except for the pandemic and are doing it now

 

On your second point, I've noticed lots of applications fitting this profile.

 

genuinely puzzling question and given migration i also find it very hard to comprehend.

For Melbourne i recall many airbnb's initially being put up for private rental, easily in the thousands, which are now going back to airbnb. As for the suburbs, i dont understand. There will still be a lot of people continue move out of home, but i dont understand how dwelling completions at the same rate as pre-covid without the migration is having such an impact. Maybe completions have slowed that much due to building shortages?

If there was a clear answer, i'm sure a news publication would have been all over it by now

 

Also internal migration is a big one - dont believe me, see this 20+ page thread on whirlpool that came up last month and go on reddit and r/melbourne to see all the new people coming in from all over Aus asking about what suburbs they should move to.

Its why i started my thread predicting 10% increase to rents in Melbourne

 

From personal experience in Melbourne not many people buy established residential investment properties worth over 1 mil. Yields have always sucked and 1 mil plus purchases I would say are over 90% of OO around here

The pre election downturn in 2018 and 2019 shifted a lot of stock from investors to owner occupiers and this trend has continued

Rental market looks as healthy as I have seen it in 10 years. There is a lack of new 3-4 br town house construction in the last 2 years (10-20km east of CBD). That part of the market is the best it's been in the last 10 years

Had a tenant on month to month wanting a decrease of $40 per week for them to sign a 12 month renewal. Kind of laughed at it and said no and surprisingly they got back to us and were keen to sign another 12 months at existing rent (may be they were trying to game us or did they do some research and worked out there wasn't much out there)

 

Yeah they were trying to game you. Now that the shoe is on the other foot, maybe you should do the same.

I don't like it when tenants try to exploit me when they see a window of opportunity. Have one like that. I'll be increasing their rent back to market value very very soon.

 

Good move! Rents up $50 a week from peak 2017 in my neck of the woods. Those wanting newish big spaces need to pay up!

 

Rents in oversupplied apartment areas I've been tracking are still depressed from precovid levels $50-100 per week under. Seems like nobody wants higher density living for now - not even renters.

 

Since covid, the demand for larger dwellings has increased. There are a lot of factors at play
- WFH trend: People who were hunting for 1 bedders, are now looking for 2, and etc.
- Hobby businesses: Need more space at home
- Students returning from overseas
- There are still areas with high vacancy rates like Schofields which gives you an indication of what renters are looking for
- Areas with the lowest house prices have had an influx of first home buyers taking away some of the supply

My partner and I usually rentvest particularly when we're doing a fairly sizeable renovation, and I have found that we've been willing to pay that little bit more in the past 2 years for 2 WFH setups:
- An extra bedroom/sunroom for WFH setup + storage
- Larger main bedroom for WFH setup
- Larger kitchen as we're eating out less and its much healthier