It may come as a surprise to tenants who have received notices of rent increases which cite the landlord’s need to cover the rising cost of a mortgage as the reason for the hike.
The best available research shows rising interest rates put downward pressure on rents.Peter Rae
Centre for Independent Studies chief economist Dr Peter Tulip said the relationship between rents and the official cash rate was difficult to pin down,but evidence showed interest rates had a more direct effect on unemployment and housing supply.
“The[Reserve Bank of Australia] is currently trying to raise interest rates to take some of the heat out of the labour market,” he said. “We have a record low employment rate which the RBA thinks is untenable.”
While individual landlords may seek to lift rents to cover increased mortgage repayments,rising interest rates would actually put downward pressure on rents,Tulip’s research showed.
Rents would fall as more people were laid off because high interest rates reduced consumer spending and the amount of money circulating in the economy,and therefore some tenants could no longer afford to pay rent. Tulip said these people would lose their homes,leaving more properties vacant and driving up the rental vacancy rate.
“So when you allow for that indirect effect,interest rates will reduce employment growth and that will take some of the pressure out of the rental market and reduces rents,” he said.
The rental vacancy rate is the primary driver of rent prices,because a high vacancy rate means landlords have little leverage to raise rents if tenants can easily and cheaply move elsewhere. Unemployment is yet to spike,but Tulip’s estimations say the unemployment rate could begin to indirectly affect rents by the end of 2023.
But this fall would be short-lived – roughly four years after prices start falling they would rise again,Tulip predicted. This would be because the period of higher interest rates slows the pace of new home building and tightly restricts the number of new homes becoming available,the early signs of which are already present in Australia’s construction sector.
“There’s been a huge reduction in housing construction,” Tulip said. “What we’re seeing at the moment is a huge reduction in approvals and over time that will flow into commencements,and in another year or two into completions,and soon after that into rental listings.”
The lack of new homes available to rent would lower the vacancy rate and drive up rents.
The modelling assumes that the cash rate remains three percentage points higher over a prolonged period of time.
UNSW City Futures Research Centre senior research fellow Dr Chris Martin,who was not involved in the modelling,said the relationship between rates and rents needed more examination.
“The other explanation ... is the rent increase we’re seeing at the moment,if they’re not driven by interest rates,they’re driven by landlords,” he said.
“They’re using it as a cover for their increases,saying:‘Oh the RBA is making me do it’.”
If that were the case,Martin said landlords were drawing attention to themselves as an inflationary pressure,adding fuel to the fire that interest rate rises were intended to fight.
Everybody’s Home national spokesperson Maiy Azize said her coalition of housing organisations had heard of landlords using rate rises as an excuse to hike rents,but she doubted it was the real reason.
“We are definitely seeing landlords capitalise on rate increases and telling tenants that’s the reason for rent increase,” she said. “It’s a reflection of a long-standing perception that people buy into that rents are a reflection of landlord costs but we know that isn’t true.”
Azize said rent increases were unconscionable during the cost of living crisis.
“It’s pretty poor form at this point in time to raise rents,” she said. “We know landlords have other options other than to raise rents.
“They can write off their losses and get a tax handout that tenants can’t get.”
Real Estate Institute of Australia president Hayden Groves said landlords would always try to gear their investment positively,but agreed that the rate rises had little to do with rising rents.
“It is absolutely a lack of supply that is the fundamental driver in this terrible situation we face,” he said. “A landlord will seek to have a fair market rent paid but there’s a great deal of them who understand the great difficulty their standing tenants are facing and will act accordingly.”