High rental growth is likely to ease from next year as the Reserve Bank of Australia signals it is near the end of its current interest rate hiking cycle and inflation begins to moderate.
Key points:
- CoreLogic analysis expects rental growth will begin to ease from 2024 as the RBA nears the end of its current monetary tightening cycle
- It says higher rent growth is not solely due to rising interest rates, with data showing rents were increasing before the RBA began to hike rates
- Share housing, more supply and the return of property investors are likely to all reduce rental demand and contribute to rental growth easing
New analysis from property research firm CoreLogic, which explored the correlation between higher interest rates and higher rents, suggests Australia’s rental market is likely to “loosen” from 2024, as inflation begins to fall and the RBA stops rate rises.
Australia’s cash rate is expected to peak this year, with NAB and Westpac forecasting a terminal rate of 4.6 per cent by September, Commonwealth Bank at 4.35 per cent by August, and ANZ expecting no further rate rises beyond the current 4.1 per cent — although those figures will likely be reviewed in the wake of June inflation data next week.
The RBA released the minutes of its July meeting on Tuesday, showing it decided to leave rates on hold at 4.1 per cent over fears that more hikes could trigger an unanticipated spike in unemployment by the end of the year.
It also said the decision to pause would give the central bank more time to assess the impact of its 12 rises over the last 15 months, but flagged future rate hikes may still be necessary despite signs of inflation gradually easing.
The major banks are also forecasting the RBA will begin to cut interest rates sometime in 2024, however the RBA has not given a time frame — instead saying it expects inflation will return to the top of its 2-3 per cent target range in “mid-2025”.
Head of research at CoreLogic, Eliza Owen, said this forecasting was good news for renters, due to the connection between rents and interest rates, which move together over time.
She said with signs that the cash rate is nearing its peak, it may also indicate that the growth in rent values has also peaked, or is nearing it.
“There are multiple reasons [interest rates and rents] might move together,” she wrote.
“For one, rents are an input in measuring inflation. When rents rise, inflation can rise, and this prompts the RBA to lift interest rates.
“Secondly, interest rates can impact rent. Higher interest rates mean investment property becomes less attractive, which could slow the delivery of new rental stock coming to market, and this could push rents higher.”
CoreLogic data in the three months to June showed that national rents remained above average, but were beginning to moderate despite strong demand.
Ms Owen’s analysis also notes that a brief growth in annual rents in September 2017 could have been the result of temporary investment lending restrictions imposed by the Australian Prudential Regulation Authority (APRA) in 2015.
She also wrote that rental supply fell in 2019 due to the general decline in the housing market, and less interest from investors due to less property being available.
Higher rents not solely due to higher rates
Although higher interest rates may have contributed to higher rents so landlords can meet their higher mortgage repayments, CoreLogic said it was unlikely that increases in rent have been solely to fund the interest rate-related increases.
Ms Owen’s analysis cited ATO tax data, which showed 47.1 per cent of property investors in Australia were negatively geared in the 2020-21 financial year — so rents were not covering interest payments on investment properties in the years before the RBA began to lift interest rates.
“To put recent rate hikes in perspective, CoreLogic monthly median rent values are estimated to have increased $225 per month over the year to June,” Ms Owen wrote.
“However, mortgage costs of a new investment loan are estimated to have increased by $948 per month on the median Australian dwelling value.”
She also noted that landlords who have rental properties with a small mortgage, or properties without one at all, may have “taken advantage” of the tight rental market in order to increase their return on investment.
“Irrespective of mortgage costs, rents can generally only rise substantially if the rental market is competitive, and tenants cannot find alternative accommodation to bargain with,” she wrote.
“In other words, rents rise when demand for rental accommodation is outweighing supply.”
What will cause rental growth to slow?
Ms Owen’s analysis noted that there was a tightening in the rental market “well before” the RBA began to lift the cash rate in May 2022, with the first signs of tightening taking place in mid-2020.
The pandemic-induced tightening was due to investor uncertainty, fewer share houses, and higher income growth, she wrote.
“Higher interest rates have slowed investment activity through 2022, and the first few months of this year, but they haven’t been the sole cause of rental increases,” Ms Owen wrote.
CoreLogic forecasts slower rent growth in 2024 will likely occur because of four factors:
- 1.Renters may return to share housing again as renting becomes less affordable, therefore reducing rental demand.
- 2.Easing construction costs and fewer approvals may ease conditions in the building sector, and as more residential dwellings are completed, renters waiting for new homes can exit the rental market.
- 3.There may be an increase in rental supply with social and community housing initiatives from government, on top of build-to-rent projects coming online.
- 4.More investors are returning to the housing market in strong numbers, and this is likely to continue if interest rate decline and property prices keep rising.
Ms Owen noted that rent growth is likely to continue moderating, and the annual growth in regional rents has slowed.
“While conditions will vary at a granular level, the rental market as a whole is likely to loosen in 2024,” she wrote.