As inflation approaches its post-peak phase, the Reserve Bank of Australia (RBA) is edging closer to concluding its series of rate hikes. This development could bring some positive prospects for renters, given the historical relationship between rent values and fluctuations in the cash rate. Typically, rent values tend to closely align with movements in the cash rate. With expectations that the cash rate will reach its apex this year, it becomes even more significant that all major banks are now predicting a decline in the cash rate throughout 2024.
Despite still maintaining a relatively high growth rate, annual rent increases have been gradually tapering off since reaching their peak in December 2022. This indicates a potential stabilization or decline in rental market growth. There are several reasons why rents and interest rates tend to move together. Firstly, rents play a role in measuring inflation, and when rents rise, it can lead to an increase in overall inflation. As a response to inflationary pressures, the Reserve Bank of Australia (RBA) may decide to raise interest rates.
Conversely, interest rates can influence rent prices. When interest rates are higher, investment in property becomes less appealing to some investors. As a result, there might be a slowdown in the availability of new rental properties in the market, leading to an upward pressure on rents.
It’s worth considering other factors that impact the rental market as well. For instance, temporary restrictions on investment lending by APRA in late 2015 may have contributed to an uptick in rents over the year to September 2017. Additionally, a decline in investor interest in property during a housing market downturn in 2019 may have led to reduced rental supply.
As for the impact of higher interest rates on investors’ decisions to increase rents, it’s plausible that some investors raised rents to cope with the higher mortgage costs. However, it’s unlikely that rents were increased to fully cover the additional interest cost. Many Australian property investors were already negatively geared, meaning rents didn’t cover interest payments even before interest rates began to rise.
To put recent rate hikes into perspective, while CoreLogic estimated that median rent values increased by $225 per month over the year to June, mortgage costs for a new investment loan on the median Australian dwelling value went up by $948 per month.
Investors who owned properties with no or small mortgages might have taken advantage of the tight rental market conditions to increase the return on their investment properties. But it’s essential to note that rents can only rise significantly when the rental market is competitive, and tenants have limited options to find alternative accommodations. In other words, rents increase when demand for rental properties outstrips supply.
Looking ahead to 2024, it’s expected that the growth in rents will slow down due to a few key reasons.
- Renting is becoming more expensive, leading some tenants to opt for sharing houses to cope with higher costs. This could reduce the demand for rental properties and consequently impact rent growth.
- The construction sector is experiencing changes. Construction costs are stabilizing, and there are fewer new projects being approved. As existing construction projects are completed, renters who were waiting for new homes may leave the rental market, affecting the overall demand for rentals.
- In 2024, there will likely be more rental properties available, thanks to government initiatives supporting social and community housing. Additionally, new build-to-rent projects will gradually enter the market, providing more options for renters.
- Another important factor is the increasing interest from investors in the housing market. As interest rates go down and home values rise, more investors are returning to the market. This trend may have a significant impact on the rental market.
In summary, rent growth is expected to slow in 2024 due to factors like rising rental costs, changes in the construction sector, increased rental supply, and the return of investors to the housing market. Renters and investors should keep an eye on these trends to make informed decisions in the rental market.