Property experts are forecasting a bounce-back in some rental prices in Melbourne by mid-2021 as the city continues on its post-pandemic recovery trajectory.

Nelson Alexander’s Head of Property Management Martin Sizer says prospective tenants currently have a plentiful supply of apartments to choose from in inner-city areas, a situation that is putting downward pressure on rents.

But he says that improvements in the jobs market, the generally upbeat performance of the Australian economy since November and the demand from tertiary students for units could soon change the supply and demand balance.

“From the tenant’s perspective, rents and the wide availability of apartments in the city have never been better,” Mr Sizer says.

However, he says vacancy rates across the more than 16,000 rental properties managed by Nelson Alexander began to decrease in mid-January and have continued this momentum through February.

“We are starting to see recovery,” Mr Sizer says. “As the COVID restrictions ease, people are coming out of the woodwork and looking to lease properties again.”

The tenant pool is now increasing with younger Australians opting to move out of their parents’ home or to shift from a share house into their own flat or unit. This raised demand is in part offsetting declines in the number of international students coming to Melbourne.

“One of the reasons there is an oversupply of apartments is that there hasn’t been the usual influx of international students and travellers,” Mr Sizer says. “

“Our Docklands office has had the highest vacancy rate in our network. That office relies heavily on rentals by overseas students, especially from Asian countries, and the Carlton apartment market also relies very heavily on international students.”

Until Australia’s international borders open up, people who want to lease homes in the city are likely to be spoiled for choice. But there are ways that landlords, working with their property manager, can move to get their properties leased and then incrementally lift rents.

“Landlords are offering one-week, two-week or three-weeks of free rent to kick off the lease,” Mr Sizer notes.

But he says some landlords are matching these incentives with six-month leases. This gives the landlord options to increase rents from mid-2021.

Other property owners are offering 18-month leases to set up continuity of income from their apartment tenants.

“Landlords in the inner-city area are very well-educated – and they don’t really have a choice but to offer incentives,” Mr Sizer says.

“If they want to get their property leased, they have to meet the market.”

It’s a tale of two cities in the rental market at the moment. Apartments are facing oversupply challenges in areas such as Docklands, Carlton and the CBD; however, demand for apartments is stronger in places such as Ivanhoe, Kew and Northcote.

In addition, houses are leasing well almost everywhere.

“When we get a new listing for a house, it’s bang and we lease it,” Mr Sizer says.

Melbourne CBD rental prices fell 27.3 per cent in the year to December, with the median unit rent dropping to $400 per week – the largest fall of any suburb citywide – the Domain Rent Report released in January shows.

Other inner-city suburbs, including Docklands, Southbank, West Melbourne, South Melbourne, East Melbourne, Carlton and Albert Park, also featured in the 10 suburbs with the largest drops in apartment rents, with falls ranging from 22.4 per cent in Docklands to 11.6 per cent in Albert Park.

Researchers with Domain say areas which have “heightened levels of apartment supply” and a greater proportion of rental demand sourced from overseas migrants or foreign students have been hardest hit by rent falls over the course of the past year.

Domain Senior Research Analyst Nicola Powell says of all the capital cities, Melbourne units have recorded the deepest fall in asking rents since the pre-pandemic period before March 2020.

The Domain data shows that asking rents for units are down 9.8 per cent across the city, with some suburbs performing far better than others. House rents, by contrast, are up nearly everywhere in Melbourne.

“Unit rents are now at 2016 levels,” Dr Powell says. “For the first time in five years, Melbourne is the third most affordable capital city to rent a unit, after Adelaide and Perth.

This is a marked change considering Melbourne was the third most expensive city to rent a unit back in March 2020.

Another factor affecting the market is that vacant inner-city apartments once used as short-term accommodation have been converted by their owners into permanent rentals.

Figures show more than half the short-stay listings in the CBD were withdrawn in 2020. According to data from short-term rental analytics firm AirDNA, available Melbourne CBD vacation rentals dropping from 3401 in December 2019 to just 1541 a year later.

But in 2021 domestic tourism is expected to bounce back strongly. The Federal Government is investing heavily in a “Holiday here this year” national advertising campaign, with domestic tourism growth, also tipped to be pushed up by constraints on international travel.

Leading property analyst group, Charter Keck Cramer, says short-term accommodation added to the rental market exacerbated the downward pressure on rents in inner-city areas. This justified a bigger reduction in rents than otherwise would have occurred.

The upshot for prospective tenants is that any significant move to shift apartments back into the short-term accommodation market, as well as an improvement in overseas migration and visitor numbers, could quickly lead to higher long-term rents.

Mr Sizer stresses that the peak leasing season in Melbourne is January-March. From late-March, tenants are likely to be confronted by new market headwinds with fewer available apartments.

The Domain Rent Report stresses that Melbourne’s elevated vacancy rate is “directly associated” with secondary lockdowns and state border restrictions. The easing of these constraints will clearly work to hike up rent prices.

If you are looking for more information on the current rental market, please visit nelsonalexander.com.au/rent or any of Nelson Alexander’s 16 offices.