Since the start of the pandemic in March 2020, house rents have risen 26.5 per cent (the equivalent of $129 per week added to the median rent), and unit rents have risen 25.6 per cent (a lift of $115 per week). Rent values in regional Victoria have seen a slightly larger proportional increase since March 2020, with house rents rising 28.6 per cent (or an equivalent weekly rent value increase of $106) and unit rents up 31.8 per cent (up $93 per week).
Rental market update
Rent values across Melbourne have risen strongly over the past 12 months, up 9.0 per cent in the year to May 2024. Recent high growth in rents follows an initial decline at the onset of the pandemic.
Much of this turnaround in rental performance is tied to changes in migration. Melbourne has historically been a preferred destination for overseas arrivals to Australia, accounting for 27.7 per cent of net overseas migration to Australia last year. ABS data shows more than 60 per cent of recent overseas arrivals to Australia are renters, meaning overseas migration has a rapid impact on rental demand.
Net overseas migration (FY) – greater Melbourne
Net overseas migration to Melbourne was negative amid pandemic border closures, reaching almost -90,000 people in FY21. This bounced back to 140,000 in FY23, well above the pre-pandemic average, creating a sudden demand for rentals.
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Rent values across Melbourne are up 9.0% in the past 12 months to May 2024.
Internal migration trends have also improved. Net interstate migration bottomed out through the pandemic, but this ‘leakage’ of population had largely subsided in the year to September 2023. While internal migration does not have as big an impact on rental values in the short term, fewer departures from the state means less available housing for renters over time.
On the supply side, rising interest rates and modest capital growth returns may be dissuading some new investment decisions. ABS data showed housing finance for investment purchases in Victoria totalled $2.1 billion in March 2024, down from a peak of $3 billion in March 2022.
Gross rent yields – greater Melbourne
New dwelling construction has also been held back by the high interest rate environment, increased building material costs and a shortage of construction labour. In the 12 months to April 2024, 18,690 new units were approved for construction across Victoria, down 30.6 per cent on the decade average.
The good news is that low rental supply is feeding through to higher gross rent yields across Melbourne, and may already be drawing investors back to some pockets of the market. Gross rent yields are annualised rent income as a portion of current home values. Gross rent yields reached 4.7% across Melbourne units in May, which is a record high for the series going back to 2005.
Rental demand is expected to continue rising in 2024, helping to keep a floor under rent yields. However, the pace of rent growth in Melbourne may slow, with annual growth rates already showing signs of a slowdown in house and unit rents in 2024. Affordability constraints for renters may see more demand skew to the regional Victorian rental market, where there has been a re-acceleration in growth. The Centre for Population is also expecting net overseas migration to normalise in FY25, which could further contribute to the moderation in rent growth. However, with rent supply and new construction remaining constrained, there is little prospect for a decline in rent values over the next 12 months.
Curious to learn more? Eliza Owen and Andrew McCann take a deep dive into the factors shaping rent growth in the second season of the Jellis Craig podcast: Inside Melbourne's Property Market. Inside Melbourne's Property Market.
