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What’s driving up rent prices in Australia?

What’s driving up rent prices in Australia?

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What's Driving Up Rent Prices in Australia?

Australia’s senior economic figures have weighed in on the causes of the crisis. Rents have been rising at the fastest level in over a decade and there’s likely more to come. Treasury Secretary Steven Kennedy – the government’s most senior economic adviser – told a Senate hearing today he expected the peak in rental increases will be reached in June.
What’s driving higher rental costs?

Context

While rents are rising fast today, it comes off a relatively low base. Rents have risen at a similar pace to wages in the last 20 years and much slower than house prices. Rents also fell during the pandemic. However, rents can be very high for low-income renters – about half are under ‘rental stress’, spending over a third of their income on rent. High house prices also mean people are relying on renting for longer.

No Vacancies

One factor contributing to rising rents is there are not enough available rental properties. The rental vacancy rate (the percentage of rental properties currently looking for tenants) has dropped sharply in recent months. This drop in rental availability has been worst in Sydney and Melbourne, where there were previously a lot of vacant rental properties during COVID lockdowns. Rental availability overall is near record lows. When vacancies are low, rental prices go up as renters are forced to compete for a smaller pool of properties. At today’s Senate hearings, Kennedy suggested this was a leading cause of rental pressure, because of both high demand for rentals and insufficient supply due to “constraints” in building housing. Kennedy told the hearing he expected more rentals would become available in the coming months, but that in the short-term this would keep fuelling price rises because there is so much unmet demand waiting to rent.

What About Interest Rates?

Higher interest rates can also affect renters if their landlords decide to pass on higher mortgage costs to tenants. However, there are limits on how often this can happen – if you’re on a fixed rental contract, your landlord generally can’t increase your rent unless the contract specifies a process for doing so, and if you’re on a month-to-month contract landlords can generally only raise rent once or twice a year (depending on the jurisdiction you’re in). Reserve Bank of Australia (RBA) Governor Philip Lowe, who also appeared at Senate hearings today, acknowledged the RBA’s interest rate rises had some flow-on effect to renters but suggested the vacancy issue was the main cause of the problem. He also argued inflation – the reason the RBA is raising rates – was especially “nasty” for people on low incomes. “I know it’s really hard for people to pay more… but it’ll be harder still if inflation gets too high and stays too high,” Lowe said.

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