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RBA rate rise: This is what will happen to your rent

The Reserve Bank of Australia (RBA) has lifted the cash rate for the first time in 12 years, upping the official rate from 0.25 percentage points to 0.35 per cent.

Renters may also be wondering if they have anything to fear from rising interest rates: if your landlord’s mortgage repayments rise, isn’t a rent increase logical?

Not necessarily.

Independent economist Saul Eslake said rents were determined by supply and demand, not by how much landlords needed to cover their costs and make a profit.

If tenants face a steep increase in rent, they simply move – provided there are other rentals available at a cheaper rate.

That’s why vacancy rates are the primary indicator of rental market competitiveness.

A vacancy rate of over 3 per cent typically suggests tenants have the upper hand in the market.

Once vacancy rates start dropping below 2-2.5 per cent, competition between tenants starts heating up and landlords are in a better position to increase rents.

“Landlords haven’t passed on to tenants, in the form of lower rents, the reductions in interest rates over the past two years since the onset of COVID-19, or indeed, over the past 30 years, since interest rates peaked at 17.5 per cent,” Eslake said.

“Nor should it be expected that they would be able, in general, to recoup increases in interest rates in the form of higher rents.”

In rental markets where vacancy rates were very low, such as in Tasmania, Eslake said landlords may try to raise rents and “blame it on higher interest rates, although in reality they’ll be raising rates just because they can”.

“But in markets where vacancy rates are relatively high, such as Melbourne, they probably won’t.”

Metropole founder and chief executive officer Michael Yardney also said interest rates didn’t directly affect rental values.

However, he said some “indirect consequences” would push rental rates up even higher.

He said Australia was facing a rental crisis, with national vacancy rates down to the lowest on record. Most locations were seeing vacancy rates below 2 per cent.

And with international borders reopened, Yardney expected to see more pressure on an already-tight rental market.

The influx of migrants could push rents even higher, particularly in Sydney and Melbourne where tourists tend to congregate.

“Currently, if affordability becomes constrained – particularly in Sydney and Melbourne, where house prices have risen considerably – then potential homebuyers will have difficulty getting loans, particularly in a higher-interest-rate environment, and this will add extra pressure on our rental markets,” Yardney said.

 

Article from: au.finance.yahoo.com