Landlords not to blame for high rents, RBA finds
Landlords are a negligible factor in high rents according to RBA analysis that coincided with the release of strong employment figures that are propping interest rates up.
The notion that landlords pass their increased borrowing costs onto renters has been dispelled by the Reserve Bank of Australia (RBA).
Interest rates and rents often move in tandem but the RBA report released Thursday (17 October) concludes that the cause and correlation are not as entwined as many would expect.
While there was some link between interest rates and rent increases, it was very small the report authored by Declan Twohig, from the Economic Analysis Department, and Anirudh Yadav and Jonathan Hambur, both from the Economic Research Department, concluded.
They found that other factors were driving rents higher.
“We found limited evidence that investors pass on changes in their interest costs to their rents,” the report noted.
“This is consistent with the standard view that the level of housing demand relative to the stock of properties available is the key driver of rents.
“Indeed, the RBA’s assessment is that high rent growth in recent years reflects this fundamental force.
“Housing demand has been strong, supported by high population growth and increased preference for more space, while supply has been hampered by ongoing capacity constraints and increases in construction costs.”
“Higher interest rates have little immediate direct effect on rents as the overall supply of housing in the economy is essentially fixed in the short run,” the report noted, citing this second graph.
“But higher rates should reduce rents indirectly by lowering incomes and therefore housing demand.”
Applying a best and worst case scenario based on their data analysis, the report authors argued that a miniscule proportion of increased rents could be attributed to landlords passing on higher loan repayment commitments.
“Our biggest estimate suggests that investors increase their rent by 3 cents when their interest costs increase by one dollar.
“To put this in context, this estimate implies that in response to the $850 increase in their interest costs between April 2022 and January 2024, the median leveraged investor would have increased their rent by around $25 per month.
“This increase in rent equates to around 1 per cent of the median monthly rent as of January 2024.”
The authors highlighted the difficulties they faced in separating the many variables that can influence the trajectory of rents.
“Pinning down the relationship between interest rates and rents is tricky because both will tend to move together with the economic cycle.
“For example, a strong economy, with a pick-up in income growth, will see increased demand for rental properties.
“This will put upward pressure on rents while, at the same time, interest rates may be raised to reduce inflationary pressures, so the observation that rates and rents move together may be a case of correlation, rather than higher rates causing higher rents.”
To see whether investors simply pass through rate changes to their tenants, the RBA compared charges in rental income for investors with different levels of debt.
“Our estimate suggests that this $850 increase in interest costs would have raised rents by less than $10 per month or just over $2 per week,” Mr Twohig said.
Prospect of rate cut diminishes
Those landlords contending with stubbornly high interest rates will likely have to wait some time to see them cut.
Ahead of the latest employment data from the Australian Bureau of Statistics, investors were betting on a 40 per cent chance of a rate reduction by December and a 70 per cent chance by February.
Surprisingly strong employment data released Thursday (17 October) will do nothing to cool the economy and the inflationary pressures that are buoying interest rates.
The unemployment rate was steady at 4.1 per cent in September, in line with the revised figure for August, according to seasonally adjusted data released today by the Australian Bureau of Statistics (ABS).
With far more jobs added to the workforce than expected in September, any pressure on the RBA to lower interest rates has eased even further.
Bjorn Jarvis, Head of Labour Statistics, ABS, said that despite the slight fall in the number of unemployed people, the strong rise in employment saw the participation rate rise by 0.1 percentage point to a record high of 67.2 per cent.
“Employment has risen by 3.1 per cent in the past year, growing faster than the civilian population growth of 2.5 per cent.
“The record employment-to-population ratio and participation rate shows that there are still large numbers of people entering the labour force and finding work in a range of industries, as job vacancies continue to remain above pre-pandemic levels.
“While the number of unemployed people fell slightly to 616,000 in September, overall the number of unemployed people has risen by around 90,000 people since September 2023.”
Despite this rise over the last year, there are still around 93,000 fewer unemployed people than there were just before the start of the pandemic, when the unemployment rate was at 5.2 per cent.
RBA Governor Michele Bullock has previously said the strength of the job market is one factor preventing the official cash rate being reduced from its current 4.35 per cent.
Australia now boasts one of the lower unemployment rates among developed countries in the developed world.
The unemployment rate in the US mirrored Australia’s at 4.1 per cent in September, while the jobless rate in Canada was 6.5 per cent, France is at 7.3 per cent and in New Zealand, it was 4.6 per cent in the June quarter.
In the United Kingdom, the unemployment rate is 4.0 per cent but the equivalent of the RBA’s official cash rate sits at a much higher 5.0 per cent.
