Breaking the silence on the argument that has been doing rounds within investor circles for some time now, RBA has finally published an article in which the central bank has found it inconclusive that high interest rates have driven rent increases over the last few years.
This was primarily suggested by the fact that leveraged property investors will naturally pass on the increase in Mortgage Costs to their tenants driving the rental up significantly.
In its analysis, RBA suggested establishing a simple relationship between interest rates and Rent growth might be a little less straightforward than how it appears to be in the above graph. These two parameters are correlated as cash rates are usually increased to control inflation levels, and increased rental levels also point towards increasing inflation. This establishes a correlation between these two parameters, not a direct causal relationship.
How does Cash Rate Increase Affect Rental Rates?
RBA utilized tax return data to analyze the direct impact of interest cost changes on rental income. RBA found out post this analysis that on average for every 100-dollar increase in investor’s mortgage interest costs, they increase rent by 1 Dollar. This ultimately suggests that the $850 increase in mortgage interest payments would have raised rents by $2 per week, basically increasing the median monthly rent by around 0.4% in January 2024.
The supply side remains the Major Driver for Rental Inflation
RBA’s analysis revealed and is in line with the fact that supply-side constraints in housing along with an upward push in demand is the key driver of rents. Housing demand has been strong owing to strong overseas immigration and demand for more spacious properties, while on the other side supply side has been continuously hit by increasing construction costs and low availability of ready-to-occupy stock.
RBA concluded that to ease the rental inflation crisis in Australia, the Housing Industry along with policymakers should focus more on the supply side of the Industry, bringing in more ready-to-occupy stock and working on lowering construction costs to boost the development of new housing supply as well.
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