Rents to increase as interest rates rise, RBA warns

Rental prices are set to increase over the next year as the construction downturn and population growth continues, the Reserve Bank of Australia has warned.

Analysts say that while rental prices have cooled over the past few months, vacancy rates are starting to fall and more renters will be pushed further into the outer suburbs causing longer, more expensive commutes.

“The outlook for rents is for them to rise. But this is also going to create quite an issue for affordability, with people going into renting rather than buying a home. This is going to put quite a strain on demand for rental properties,” Australian Property Monitors general manager Anthony Ishac warns.

The RBA said in the minutes of its October board meeting yesterday that it has noted a slowdown in the pace of borrowing by households, along with a cooling in property prices. It said this was a “welcome development, given the significant longer-term run-up in prices”.

However, it also said “there were some signs that the rental market was tightening again”.

“The tightness in the rental market was likely to persist given the ongoing strong population growth and the decline in housing approvals this year, and could be expected to feed into increases in rents. Approvals for construction of apartments remained at low levels in most states, with Victoria a clear exception.”

Ishaac says rental prices will increase in the anticipation of interest rate rises, the first of which is expected to occur next month. This, he says, will cause even more potential first home-buyers to remain in the rental market and the drum-up in demand will keep prices high.

“There will be a tight rental market over the next year. Vacancy rates are going to be law and you’re going to have much higher demand for units, which is what was happening similar to the GFC.”

The warning comes although rents have managed to stay flat this year. The latest figures from APM found rents actually declined by 0.3% for houses and 0.5% for units in the three months to September.

Over the year, Melbourne and Brisbane recorded 0% growth for houses, while Perth and Brisbane recorded 0% growth for units. Darwin unit prices decreased by 2.3% over the year as well.

For the quarter, houses in Sydney, Brisbane and Canberra recorded 0% growth, while Melbourne prices actually fell by 1.4%. Adelaide, Hobart and Darwin prices grew by 1.5%, 3.3% and 3.8% respectively.

For units, Sydney, Brisbane, Adelaide and Canberra all recorded 0% growth. Darwin prices fell 4.4%, Perth prices fell 2.8% and Melbourne prices fell by 1.4%. Hobart was the only city to record growth at 4.2%.

But Ishac says the country’s strong economic outlook will keep prices high, coupled with supply and demand issues. He says the market is returning to a pre-GFC mindset where rents will increase on a regular basis.

“It wasn’t uncommon for rents to be increased every six months, and because there is so much demand it puts the power in the hand of the landlord,” he says.

“It’s going to make it much more difficult for people to find a place to live, and they are going to be pushed out into the outer suburbs. They simply won’t have the choice in rental properties because they’ll be pushed out.”

The other main problem is construction. Housing Industry Association chief economist Harley Dale says the RBA is right to point out approvals still remain low, and says the problem will not be fixed unless procedural reform is introduced and developers are able to construct buildings more quickly.

“Rental increases will be due to a lot of things. We did have a very long period of decline in investment in new rental stock – however that situation seems to have turned around now, although it’s moving from a very low level.”

“But we do have longer than usual delays still in the system. The length of time it’s taking to get from obtaining finance, to building approval, etc, that whole length of time is blowing out in a lot of instances which is a problem.”