Tenants hearing talk of a housing market downturn would be forgiven for thinking they will get a break on the cost of their rent.
While national property values dropped 2 per cent in the three months to July, on CoreLogic figures, and are expected to fall further, the rental market is heading in the opposite direction.
The country is in the grips of another rental crisis, with Australian rents now 9.8 per cent higher over the year to July on CoreLogic figures – and that is unlikely to ease as population growth returns to normal, adding to more rental demand.
Rents and property
prices are diverging because property prices are largely driven by interest rates and the ease of securing a home loan, while the cost of renting depends on the availability of rentals compared to demand, experts say.
So while the combination of rising interest rates and caps on borrowing capacity have reduced homebuyer budgets, the rental
vacancy rate has plummeted to record lows around the country, leaving renters with few options to choose from and landlords holding the upper hand in charging higher rents.
The options available are further restricted because some landlords have moved their properties from the long-term
rental market into the short-stay market as the economy reopened and tourism returned.
Impact Economics and Policy economist Dr Angela Jackson said while landlords may use the excuse of higher
mortgage rates as the reason for rising rents, the availability of rentals was the ultimate driver.
interest rates might be used as an excuse, but that’s not the reason driving higher rents. The reality is the market has tightened significantly, and they can increase their rents, so they do,” Jackson said.
“You would think there would be this relationship between house prices and rents but that just doesn’t hold – it’s about the supply of rental housing.”
Jackson said the tree- and sea-change trend pushed more renters into already undersupplied
regional rental markets. Changing household formation was also squeezing the number of available properties for lease, as tenants keep a spare bedroom for a home office or share with fewer housemates during the pandemic. The country is in the midst of another rental crisis as tenants are hard-pressed to find homes and rents that keep up with incomes.CREDIT:JANIE BARRETT
“It partly has got to do with people who moved home and are moving back out. There are fewer people in each household, the nature of what people are demanding has changed, and you’ve got the return of migration. The arrivals are getting back to pre-pandemic levels.”
The Australia Institute senior economist Matt Grudnoff said the main reason property prices in the sales market skyrocketed for two years after the pandemic hit was because the cost of borrowing money was at record lows and was now back on the rise.
“The reason house prices went up when rates were down wasn’t because everybody was richer. It was because money cost less,” Grudnoff said.
“The cost of housing is the combination of the price and the interest rates. Almost everybody borrows to buy the house.”
Meanwhile, asking rents shoot up when there is a shortage of availability like now, he said, putting landlords in the box seat and allowing them to increase their prices.
Tenants’ Union of NSW chief executive Leo Patterson Ross said there were not enough
homes available for lease that suited renters’ needs two years into a pandemic, where space, amenities and good-quality properties are more valuable than ever before.
“There are not enough homes that are suitable in size and location and in price and quality for the needs of the community,” Patterson Ross said.
He said asking rents were ultimately set by supply and demand.
“At the end of the day is there enough
properties to meet the demand of people who need to rent? [The sales and rental markets] are set by very different factors, and they can move in different directions.”
While rising interest rates may prompt a landlord to hike their asking rents, and some investors are quick to suggest passing on higher borrowing costs to tenants, state laws limit how often a landlord can increase rent.
“That couple in Melbourne, for instance, who just bought the place and just put up the rent. If their costs change the week after the contract they don’t have the capacity legally to increase the rent,” he said, adding that someone who has held a property for longer could test the market anew.
He said that the largest cost to landlords was the interest component of their mortgage repayments. Rising interest rates cost the public purse if landlords’ rent does not cover the costs of holding the asset through the tax deductions available for negatively geared properties, and experts estimate these tax breaks could cost taxpayers up to $6 billion in coming years.