The rent myth: measurement and supply

Domain are running an interesting article today, suggesting it's only a matter of time before apartment rents start to dwindle and we can all live happily ever after.

It starts:

Record high-rise building in Sydney has yet to provide any relief for renters, with apartment rents jumping sharply in the June quarter, data shows. 

The median weekly advertised rent for an apartment in the harbour city is now $520 a week, just $5 cheaper than houses, according to Domain Group’s Rental Market Report released on Thursday. 

But experts are predicting the trend will turn around as a record surge in apartment developments are built, mainly owned by investors looking for tenants.

This raises a couple of points worth exploring.

The first is the way organisations like the Domain Group measure rents - they check the property pages to see how much landlords are asking. This gives a skewed view of rents, as landlords don't always get what they want, and rents are not always quite as high as these reports suggest. Not only can this paint a misleading picture of life on the treadmill, but it can lead to inconsistencies in the reports themselves. For instance, the Domain Group's report from June 2015 had house rents at $530/wk, but by September this had been revised down to $525/wk. The latest report has kept house rents at $525/wk for that period but says they are now at $530/wk, showing an increase of 1% over the year. We're not sure why they do this exactly, but it happens from time to time. No doubt they have their reasons.

A much better way to measure rents is to look at how much tenants are actually paying, and it's possible to do this in New South Wales by checking the bonds that are being lodged with the Rental Bond Board. Our Rent Tracker series does just that - it's worth a look if you're ever wondering how actual rents have been moving in your area.

The second point is that building new blocks of apartments does not automatically reduce the rent - especially not before they're finished. To be fair, the Domain article does acknowledge that the bulk of new building has not yet been finished, with First Home Buyers Australia's Taj Singh saying:

Despite the record levels of apartment building … a lot of the new supply will be coming onto the market later in 2016, with most of the supply to come on the market 2017.

Singh is right - it really is too early to say how "record levels of apartment building" will impact on rents across the board. But we can look at parts of Sydney where the private rental market has grown, and see what the effect has been there. Looking at the number of bonds lodged between 2010 and 2015, as well as how much rents have increased over that time, tells us that a growing rental market does not always bring the rent down:

• Camden saw a 57% increase in the number of bonds held, and rents went up by 21%
• Botany Bay saw a 52% increase in the number of bonds held, and rents went up by 45%
• Auburn saw a 41% increase in the number of bonds held, and rents went up by 20%
• Maitland saw a 36% increase in the number of bonds held, and rents went up by 9%
• Blacktown saw a 34% increase in the number of bonds held, and rents went up by 19%

By comparison, the following areas saw much lower growth in the rental market:

• Blue Mountains saw a 1% decrease in the number of bonds held, and rents went up by 25%
• Leichhardt saw a 1% increase in the number of bonds held, and rents went up by 20%
• Waverley saw a 2% increase in the number of bonds held, and rents went up by 21%
• Mosman saw a 3% increase in the number of bonds held, and rents went up by 23%
• Manly saw a 3% increase in the number of bonds held, and rents went up by 30%

An article from the AFR earlier this year looked into this in some depth from the perspective of a Chatswood bound house-hunter - it begins: "A long queue is usually a sign something of value is at the end of it. That wasn't the case in Sydney's Chatswood on Saturday". It's worth revisiting.

There are two problems at play here. The first is that it would take even more "record levels of apartment building" to make up the required shortfall, and the second is that new supply is usually dropped into the mid- to high-end of the market, coming at the expense of more affordable homes that have been demolished to make way for something new.

We'll have a closer look at these two problems a little way down the track.