Interest rates hold huge implications for rental, property markets
Mortgage holders and renters are in a similar position, with a third of their income servicing accommodation demands, but will a rate cut help or hinder affordability?
Much has been written about the Reserve Bank’s decision last month to leave rates unchanged.
Most commentators think it was the wrong call. A mild spike in the unemployment rate following the rate decision has been interpreted by those commentators as proving their point.
Now we have the latest CPI data showing headline inflation at 0.7 per cent in the June quarter, and the annual rate down to 2.1 per cent, having eased to well within the RBA’s target band.
Attention thus turns to the RBA’s Board meeting on Tuesday (12 August) and whether a cut will be delivered. The signs point to yes, but they did last time too.
It will be good news for mortgage holders but not so much for those in the market to buy. Lower rates typically mean further upward pressure on prices, and prices are already at all-time highs. Those saving for a deposit will also see their bank account interest rates cut.
We also need to consider the shortage of property currently available. Let’s hope spring sees more vendors in the market.
Cotality’s Home Value Index shows Australian median dwelling prices have increased 2.3 per cent since the cash rate cut in February this year. In Sydney, values are up more than 2 per cent for the same period.
Another rate cut can be expected to have a similar impact on prices.
Rents can’t keep rising
At the same time, rents are growing too, but they are growing at a slowing rate. It’s on this point that the nature of the commentary on the rental market often ignores the human perspective.
Everyone acknowledges extremely tight rental supply as one of the defining factors of today’s housing market. For this reason, it seems, reports of easing rental growth appear to come as a surprise to many observers of the data.
Moderating rental price growth shouldn’t necessarily be a surprise though. Tenants, on the whole, are already stretched to their limits.
Consider average household sizes, which are on the rise, a point some have interpreted as a tempering in demand. But is this because people want to share a home with more people? Or is it because they have to?
At a time when finding a rental home is so difficult, people increasingly need - not want - to compromise on their ideal living circumstances.
Cotality recently stated that: “The disproportionate increases in rents and wages have seen the portion of pre-tax income directed to rental payments rise from around 26 per cent in June 2020 to just under 33 per cent in December 2024.”
It is concerning when one considers that banks have traditionally considered 33 per cent as the maximum permitted amount of the household income to service a mortgage.
Rental growth can’t continue at a pace tenants are financially unable to manage. And easing growth is still growth, which doesn’t help tenants. It just means the dream of property ownership for many erodes further away at a different pace.
Only through the delivery of more properties can that dream be brought back into focus.
