Why higher interest rates aren't to blame for the rental crisis
-
Loading... - Blake Barnes
- 22 Mar 2023
- 69 Views
- 0 Like
- 0 Comment
In the past year, most parts of the country have seen median advertised rent prices on realestate.com.au rising in the order of 10%.
With rents growing so quickly, there have been concerns expressed that the Reserve Bank is worsening the rental crisis, by hiking interest rates by 3.5 percentage points in less than a year.
Landlords are facing substantially higher mortgage costs, and that’s forcing them to raise rents – or so the argument goes.
RBA governor Philip Lowe has been reluctant to accept that criticism. In his recent appearance before the Standing Committee on Economics, he had this to say:
"The critical issue here is the lack of rental accommodation. That's what's driving higher rents, not higher interest rates."
He has good reasons to say this.
The simple version of economic theory doesn’t support a link from interest rates to rents. And, more importantly, the data doesn’t either.
Changes in interest rates and national-level rents shows no systematic relationship. Nor is there a relationship at the level of an individual rental property when we compare rent increase for rentals with and without a mortgage.
Instead, the reason rents are rising so rapidly is that rental markets are extremely tight – there just aren’t enough rentals for everyone that wants to rent.
In theory, higher interest rates lower home prices – they don’t raise rents
In theory, higher interest rates don’t affect the current supply of rental homes, nor the number of people looking for rentals.
Interest rates don’t (in theory) directly impact rents. Instead, interest rates affect home prices – which is what we are seeing at the moment. Home prices have fallen as interest rates have risen.
Interest rates can matter for rents, but only in the longer run. Higher interest rates can reduce how many homes are built, which will lower the supply of housing. But this effect takes time – around four years. Read More…
