The impact of interest rates on the Australian rental market. – Realty.com.au Blog
The impact of interest rates on the Australian rental market is complex and not always direct. While a cut in interest rates provides mortgage holders with repayment relief, economists suggest that its effect on rent price pressures might not be immediate.
The conventional argument that interest rate increases should decrease rents is contested by real estate agents who often claim landlords pass on interest rate increases to tenants. However, research suggests that landlords don’t necessarily pass on cost savings or increases to tenants; comparable properties tend to rent for similar amounts regardless of the landlord’s mortgage status. Notably, one in four landlords may not even have a mortgage, making them unaffected by rate changes.
RBA modelling suggests that long-term interest rate cuts could increase the supply of rental housing, potentially pausing rent growth. A reduction in interest rates might also boost the construction industry, leading to an increase in the number of homes being built, thereby increasing housing supply. However, this increase in supply could be offset by increased demand as renters have more disposable income, resulting in a limited net impact on rents.
Experts argue that the cash rate is not the most significant factor shaping rental prices. Population growth and the undersupply of rental properties, evident in low vacancy rates, are considered more influential drivers of rental price increases. Tight rental conditions allow landlords to raise rents significantly due to this undersupply.
Interestingly, the prospect of interest rate cuts can bring investors back into the market to purchase rental properties, potentially increasing rental supply and helping to slow down the pace of rent increases. Furthermore, lower interest rates can increase the borrowing capacity of renters, potentially enabling more of them to buy homes, which could ease pressure on the rental market in the long term.
In summary, while interest rate cuts offer relief to mortgage holders and could theoretically increase rental supply in the long run, their direct and immediate impact on rental prices is debated. Factors like housing supply, population growth, and investor activity are seen as more dominant drivers of rental market dynamics.
