$700 a week and not moving: why a 1 per cent vacancy rate stopped lifting rents, and what that does to your sums

$700 a week. That is the median capital city house rent for the September quarter, according to new Domain data reported by the ABC, and it did not move. Not up. Not down. Flat.

At the same time, the national vacancy rate sits at 1 per cent. A year ago that combination would have been a contradiction. Almost no empty rentals, record-high rents, and yet no growth.

Domain's chief residential economist Nicola Powell put it plainly to the ABC: tenants' ability to absorb further increases is now the thing limiting rental growth. There is, in her words, almost a disconnect between where the vacancy rate sits and what is happening to rents.

If you own a home with equity and are weighing an investment property, that one sentence should change your spreadsheet.

What changed

For three years the rental story was simple. Supply was short, so rents rose. Investors underwrote purchases on that logic and, for a while, it worked.

The September quarter broke the link.

• Capital city house rents were unchanged at $700 a week.
• Unit rents rose 1.5 per cent across the capitals.
• House rents flatlined in Melbourne, Brisbane, Perth and Adelaide.
• House rents fell by $5 a week in Sydney and $10 a week in Canberra, erasing gains from June.
• Only Darwin, up 5.3 per cent, and Hobart, up 1 per cent, recorded house rent growth.
• The national vacancy rate rose 0.1 percentage points to 1 per cent.

All of those figures are Domain's, as reported by the ABC on 8 October.

The supply shortage is real. Powell still describes every major capital and regional area as a landlords' market. But a shortage only lifts rents while tenants can keep paying. Independent economist Cameron Kusher told the ABC what renters are doing instead: moving to a cheaper, less ideal location, sharing a house, or staying with parents longer. They are trading down rather than paying up.

That is the ceiling. It is set by household incomes, and it has arrived.

Why this matters if you have equity to deploy

Most equity-funded investment purchases are built on a cash-flow plan that looks something like this: the property is a few hundred dollars a week short today, rents rise 5 to 8 per cent a year, and the gap closes within two or three years.

The September quarter says the second step can no longer be assumed.

If the rent you can get today is the rent you will have for a while, the shortfall you sign up for is the shortfall you carry. On a typical capital city house at $700 a week, a rent that stays flat for twelve months instead of rising 5 per cent is about $35 a week you planned on and will not receive. That is roughly $1,800 a year, every year it stays flat, coming out of your own pocket rather than the tenant's.

That argues for pricing the deal on what is true now, and staying in.

The decision, and the trade-offs

Someone with usable equity and borrowing capacity faces three honest choices.

1. Buy on today's yield and treat rent growth as upside. The purchase has to work at the current rent. If it only works at next year's hoped-for rent, it does not work.

1. Prefer the segment that is still moving. In this quarter, units rose 1.5 per cent while houses sat flat, and the shortage is still acute. A cheaper rental that a tenant can actually afford is the one that stays let when households are trading down.

1. Choose the market, and the street, where incomes can carry the rent. Darwin and Hobart grew. Sydney and Canberra slipped. A national median hides all of that, and a suburb median hides nearly as much.

The expensive mistake is the one most people are still making: buying the suburb everyone talks about, at the rent the agent quotes, and assuming the vacancy rate will do the rest. The vacancy rate just told you it will not.

The Ripehouse reframe

We do not make rent forecasts, and we are not going to start today. What we do is test whether a specific property on a specific street can be let at a specific rent to the tenants who actually live there, on their incomes, with their alternatives.

Two streets in the same suburb can be having completely different outcomes right now. One sits in the price band local tenants are trading down into, and it lets in a week. The other sits above what those same households can stretch to, and it drifts on the rental listings for a month while the owner cuts the asking rent in $10 steps.

Same suburb median. Same vacancy rate. Opposite result.

That is why we look at the asset, the street and the tenant pool before we look at the headline. Our client portfolios have grown at a median of +19.0 per cent a year on a 5-year rolling basis, against roughly 6.3 per cent for the combined capitals, and we publish the full distribution, including the portfolios that underperformed. The benchmark is CoreLogic/Cotality. Past performance is not a guarantee of future results.

The lesson from this quarter is structural. A flat $700 suits the owner whose numbers were built on $700, and slowly bleeds the owner whose numbers were built on $750.

Want to see how we test an equity-funded purchase against what local tenants can actually pay, street by street? Join Jacob's free live webinar.