Yahoo Finance Rent crisis: Rising rents expected to ease in 2024
Rent growth is expected to slow next year, according to new analysis.
The Reserve Bank of Australia (RBA) is getting closer to the end of its interest rate hikes and this could be good news for Aussie renters as well as mortgage holders.
The cash rate is widely expected to reach its peak this year, and all of the Big Four banks are now forecasting rate cuts through 2024.
According to new analysis by CoreLogic, the peak in interest rates could signal an end to rising rents. Here’s why.
Also read: $34 difference: Why renting units is not worth the cost
Also read: Suburbs where hundreds of Aussies are fighting over a single room
How are rents and interest rates related?
There are a number of reasons why rents and interest rates move together, CoreLogic head of research Eliza Owen said.
“For one, rents are an input in measuring inflation. When rents rise, inflation can rise, and this prompts the RBA to lift interest rates,” Owen said.
“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.”
Have investors been forced to increase rents?
Some investors may have increased rents to help offset higher mortgage costs, but Owen noted it was unlikely rents had been increased to the “full extent” of the increases.
Nearly half of Aussie property investors were negatively geared in the 2020-21 financial year, according to ATO tax data, meaning rents were not covering interest payments before rates started to rise.
“CoreLogic monthly median rent values are estimated to have increased $225 per month over the year to June,” Owen said.
“However, mortgage costs of a new investment loan are estimated to have increased by $948 per month on the median Australian dwelling value.”
She noted some landlords with small mortgages or no mortgage may also have “taken advantage” of tight market conditions to increase rents.
What will happen to rent prices?
The rental market started tightening in mid-2020, Owen noted, two years before interest rates started to rise. This was due to factors including investor uncertainty, fewer share houses and higher income growth.
“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,” she said.
Owen expects rent growth will begin to slow down in 2024 because of a few different factors.
“As renting becomes less affordable, tenants may turn to re-forming share houses, which will reduce rental demand,” Owen said.
“Construction-cost increases are easing, and fewer approvals means the construction space may also unwind next year.
“As the elevated pipeline of residential dwellings under construction are completed, renters who may have been waiting for new homes to be completed can exit the rental market.”
Other factors include a lift in rental supply from government social-housing initiatives and build-to-rent projects.
Investors were also already returning to the market, Owen said, and this bounce-back would likely be stronger in 2024 if interest rates dropped and home values rose.
Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to our free daily newsletter.
