Why a lower cash rate likely equals lower rents

With the cash rate still expected to peak this year, tenants are likely also in for a reprieve, with a property market expert explaining rent values usually move in line with interest rates.

CoreLogic Head of Research Eliza Owen said not only is the cash rate tipped to peak this year but the major banks have all tipped reductions in 2024. 

“Rents and interest rates move together over time, so a peak in the cash rate may indicate that growth in rent values is also at (or near) a peak,” Ms Owen said.

Ms Owen said there were numerous reasons the cash rate and rental rates roughly tracked together, including that rents are an input in measuring inflation.

“When rents rise, inflation can rise, and this prompts the RBA to lift interest rates,” she said.

“Secondly, interest rates can impact rent. Higher interest rates mean investment property becomes less attractive, which could slow the delivery of new rental stock coming to market, and this could push rents higher.”

Ms Owen said other instances of a correlation between investment activity and the rental market include temporary APRA investment lending restrictions in 2015 likely pushing up rents in the year to September 2017, and rental supply falling in 2019 as housing markets transitioned through a broad-based decline, prompting investor interest to wane.

She said investors in the current market may have increased rents to help pay higher mortgages but it was unlikely they covered the full amount.

“Australian Taxation Office (ATO) tax data from the 2020-21 financial year indicated close to half (47.1 per cent) of Australian property investors were negatively geared, meaning rents were not covering interest payments on many investments even before interest rates started to rise,” Ms Owen said.

“To put recent rate hikes in perspective, CoreLogic monthly median rent values are estimated to have increased $225 per month over the year to June. 

“However, mortgage costs of a new investment loan are estimated to have increased by $948 per month on the median Australian dwelling value.”

But Ms Owen said irrespective of what happens with mortgage costs, rents can usually only rise in a competitive market where demand outweighs supply.

She notes that in this cycle, a tightening in the rental market started before interest rates started to rise.

“The rental market started to tighten in mid-2020, while the cash rate wouldn’t go up for another two years,” Ms Owen said.

“The rental market tightened from a number of factors besides interest rates, including investor uncertainty, less share-housing, and higher income growth. 

“Higher interest rates have slowed investment activity through 2022, and the first few months of this year, but they haven’t been the sole cause of rental increases.”

Next year, Ms Owen said in addition to a lowering of the cash rate, rents could fall for a number of reasons, including tenants returning to share houses, a potential lift in supply from government initiatives and a flow of more new homes being completed leading to tenants leaving the rental market in favour of home ownership.

“Housing finance data shows investors are already returning to the housing market, and this bounce-back is likely to be stronger in 2024 if interest rates decline and home values continue to rise,” she said.

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