Shrinking households and a limited supply of rental properties have combined to push up rents at the fastest annual pace since 2008.

CoreLogic found people sought out larger homes during the pandemic to work from home more comfortably and to reduce their exposure to COVID-19 – a trend that led to a larger number of smaller households fighting over the same number of homes.

The property firm’s latest Quarterly Rental Review, released on Wednesday, shows rents are now 9.1 per cent higher across the capital cities and 10.8 per cent higher in the regions than they were in June 2021.

CoreLogic research analyst and report author Kaytlin Ezzy said this was the highest annual growth in rental values since December 2008, when demand was pushed up by record levels of international migration.

“However, the current surge in rental demand has occurred largely in the absence of overseas migration and has instead been driven by factors including low supply and a decrease in the average household size, which has amplified domestic rental demand over the COVID period to date,” she said.

Pricier rents are a blow to Australians already dealing with the rising cost of living and falling real wages, with this month’s 5.2 per cent increase to the minimum wage set against a backdrop of inflation estimated to peak at 7 per cent by the end of the year.

Before the recent minimum wage and rent hikes, Australians earning a full-time minimum wage could afford just 2 per cent of rental listings across the country.

Shrinking households driving rents up

Australia’s strict pandemic border restrictions, the last of which officially ended on Wednesday, effectively halted international migration over the past two years and has left potential migrants hesitant to make the trip down under.

This means international migration, usually the biggest driver of rent hikes in capital cities, has taken a back seat to local supply-and-demand issues.

CoreLogic research director Tim Lawless said the pandemic shrunk household sizes as Australians opted to use spare rooms for home offices instead of bringing in lodgers.

Either that, or they swapped higher-density apartments for bigger homes that made it easier to work from home and reduced their exposure to COVID-19.

Smaller households in turn created more demand for rentals that was not met by supply, resulting in a “very tight” market that has put upwards pressure on rents.

CoreLogic found national dwelling vacancy rates have now fallen to 1.2 per cent – down from 2.2 per cent this time last year.

Melbourne Australia’s cheapest rental market

Canberra hosts Australia’s most expensive rental market, but Adelaide recorded the lowest vacancy rate across all property types, with just 0.3 per cent of the city’s houses and units vacant in June.

Adelaide’s unit and house prices rose accordingly over the three months to June, up by 3.9 per cent and 4.4 per cent, respectively.

The price surge in Adelaide means Melbourne has displaced the City of Churches as Australia’s most affordable rental market – something Mr Lawless said had been a long time coming.

“We got to this point because of the pandemic, which saw Melbourne locked down for more than other states, and it encouraged interstate outflow from Victoria to other states, including Brisbane, Adelaide and Hobart,” he said.

“At the same time Melbourne, like Sydney, has been more affected by the absence of foreign immigrants, backpackers and foreign students.

“It’s effectively transferred the rental affordability problem away from Melbourne to other cities.”

However, Mr Lawless said Melbourne won’t stay the cheapest rental city for long, as international migrants are likely to return and push up demand.

Renter relief a year away

AMP Capital chief economist Shane Oliver said rising rents are cutting into Australians’ spending power, as petrol, electricity, gas, groceries and health insurance costs are increasing as a result of pressures on global supply chains.

The rising cost of living means many renters may be forced to move to lower-quality properties, share houses, or family or friends’ couches, while some will be made homeless.

“Fortunately, most Australians aren’t in that situation, but … some people would be forced to move into cheaper rental property, which then forces other people in that property out,” Dr Oliver said.

“That’s the problem. It has a chain-reaction effect.”

Australia hasn’t seen the worst of the rental crisis, either.

International migrants have not yet returned to the country in full force, and many rental agreements struck during the pandemic have not come up for a renewal that would allow landlords to raise the rent.

Dr Oliver said some relief will likely be felt by renters in about a year, when the economy stabilises and rents are so high that single renters and couples are forced to move back in with other people, helping to reverse the current trends that have pushed up prices.

But that doesn’t mean rent hikes will stop altogether, with some analysts tipping rents to rise by $100 a week in at least 20 Australian cities and regions over the next two years.