The future of queensland's tight rental market

Between June and September, every major Local Government Area (LGA) saw a tightening in rental vacancies. In some cases, vacancies fell by well over a percentage point. This tightening of vacancy rates has been a trend since the beginning of the pandemic in March, raising a few questions.

How long can Queensland's rental markets continue to tighten? And what effect will such a tight market have on rentals and, ultimately, property prices?

The Weaken-Tighten Cycle

As with any price cycle, it's not atypical for the rental market to bounce between favouring owners and favouring renters. When vacancies are high, landlords reduce rents as they compete for tenants. Those reduced rents result in an increase in tenants, which tightens the rate of vacancies. Low vacancies allow landlords to raise their rents as tenants compete for suitable homes. When rents become too high, tenants avoid renting (either by relocating, purchasing their own home, or moving in with friends and family), thereby inflating vacancies once more.

When the REIQ published its June Vacancy Rate Report, regional locations saw a significant tightening in their rental markets. The usual cycle would suggest a stabilising or even a weakening in vacancies observed in the September report. Instead, they have continued to tighten, taking the rest of the State with them. Not only are we wondering how long can this trend continue, we are also questioning how low can vacancy rates go become before something gives?

Low Vacancies, High Rents

In theory, vacancy rates can reach zero per cent, however, it's virtually unheard of. Before that stage, rents typically rise to untenable levels, which results in tenants finding alternative housing options. Louis Christopher, General Manager at SQM Research, says the first part of this equation is already in effect.

"There's already evidence of rents rising, and if vacancy rates stay at this level, rents will keep rising and start to really accelerate," says Christopher. "In Cairns, we're recording increases for houses up 11.8 per cent over the last 12 months, and units up eight per cent." For reference, Cairns' vacancy rates dropped by 2.2 percentage points - from 3.5 per cent to 1.3 per cent - over the past six months. "This will start to happen in other regions too; where we're seeing vacancy rates fall below one per cent," adds Christopher.

Where Will Renters Go

A tight market in one region can result in tenants relocating to a nearby, more favourable market. However, with vacancy rates low across the board, their options may be limited. As rents are rising and interest rates are at an all-time low, it can occur that purchasing a property is cheaper than renting in some areas. Tenants becoming owner-occupies would ease the strain on vacancy rates somewhat, but Christopher believes it won't be the only way renters respond to a tight, expensive market.

"It could also push people back towards the CBD," he says. Inner Brisbane remains the real outlier in the vacancy rate report, recording the weakest market by far at 3.7 per cent. "We've seen a corresponding fall in rents in the CBD; units are down by 6.9 per cent," he continues. "So, what we think might happen is a reversal of this trend towards outer regional living, with some of the population moving back to the cities once again."

This flow back towards the city would be inspired by more than just rental affordability however, according to Christopher. "There are challenges in outer regional locations across Australia, where there are limited facilities, amenities, and entertainment," he explains. "There'll only be some who are happy with that, while others will grow tired and move back to the cities - especially if we start to see job creation once again."

That said, Christopher doesn't expect the population distribution to return entirely to normal. "We think there will be some percentage of those who have moved to stay for the longer term," he predicts. "There'll be people who used this simply as a catalyst to make the move." He adds that improvements in communications technology has made such a move far more viable, too.

The forthcoming December Vacancy Rate Report may reveal just how tight Queensland's vacancy rates can get - and possibly how high rents can become.

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