Rent jump means nearly as cheap to buy in some Australian cities | Insights | Bloomberg Professional Services

This analysis is by Bloomberg Intelligence Industry Analyst Mohsen Crofts and Bloomberg Intelligence Associate Analyst Jack Baxter. It appeared first on the Bloomberg Terminal.

Australian residential rents continue to surge due to limited new supply and a return to pre-pandemic migration patterns. Renting in Perth is just as expensive as buying, and Brisbane isn’t far behind, despite rising interest costs. This dynamic should drive buyer demand in these cities.

Perth, Brisbane rent to drive buyer demand

Renting in Perth is 99% of the median mortgage repayment in Perth, while Brisbane rents are 81%. This situation will continue to drive homebuying demand from renters — particularly if interest rates stop increasing later this year, but rents steadily rise. Sydney and Melbourne renters aren’t facing a similar situation, with rents at 54% and 57% of mortgage costs.

While Sydney rents are the most expensive in Australia, at 50% the average couple’s monthly disposable income, they look very reasonable compared with the 91% of disposable income required for mortgage repayments.

Perth, Brisbane cheap vs. history on buy-or-rent metric

Perth and Brisbane rents also look cheap vs. buying on a historical basis. Home price growth in the two cities have lagged those of Sydney and Melbourne, but rents have kept pace, leading to a divergence in relative cost. Relative affordability could be a driver of price outperformance over the coming years.

Australia’s rent burden on track to get heavier

Australian rent as a proportion of disposable income — after tax and standard living costs — has undergone a sharp uptick since 2021. Wage growth for the year ended Sept. 30 will lag behind 21% rent growth for the combined regional capitals. This trend will be persistent over the medium term due to strong migration constraints amid supply constraints.

Tight supply, population growth power rents’ rise

Australia’s rents will continue to climb as new migrants arrive amid supply constraints in the capital cities. Net housing supply will fall further during fiscal 2023 ending June as higher construction costs and steep central bank rate hikes cause investor activity to slow. Apartment rents are now rising faster than houses, catching up after a slow initial start. Australia’s population could grow 1.4% a year through June 2026, according to Treasury forecasts.

Australian rental yields to rise further

Australian rental yields will expand further, with rising interest rates curbing home price growth as rents increase. Sydney house rent yields rose to 2.85% in February 2023 from a low of 2.17% in January 2022, while Melbourne yields jumped to 2.91% from 2.39% in November. Yields for Perth apartments are the highest at 6.15%, while Perth houses are at 4.64%. Brisbane apartment yields hit 4.12% in February, with house yields at 5.31%.