Inflation will remain high until the rental market stabilizes, financiers warn.
The Reserve Bank of Australia is expected to raise interest rates for the seventh month in a row on Tuesday from 0.25 to 0.5 percent.
The increase will bring the current box office rate from 2.85 to 3.1.
Christian Bayliss, founder of Fortlake Asset Management and a former RBA analyst, said he expected interest rates to continue rising until they peaked at four per cent.
But he warned that inflation, which was up 7.3 percent from last year, would take longer to stabilize, largely because of the rental market.
“Rent is now calculated differently by the Australian Bureau of Statistics; what’s happening there is that new rents are coming into the market at a much higher rate than the old rates,” Dr Bayliss told Sunrise.
“It’s really important because it means that … it’s a bit like putting hot water in a bath. The hot water is much hotter than the existing one.
“If you apply the higher rental rate to the CPI, it will push the CPI above eight percent.
“It’s going to take a little while (to come down), it’s pretty structural and it’s pretty built in.”
Experts estimate that rents are currently around 6 per cent of CPI, but the ABS rent series has only grown by 1.6 per cent in the year to June 2022.
Last week the ABS confirmed it was using a new data source to measure rents in the CPI.
“The rental rate series up to July 2022 was measured quarterly using a survey of approximately 4,000 properties that are rented directly from estate agents,” the bureau said.
“The new dataset obtained by the ABS is updated monthly and includes around 480,000 rental properties, which are used to create the CPI Rents series across all capital cities.”
Experts hope that the new ABS rental measure is in line with the real state of the market.
In the process, however, rents will inevitably soar and push CPI up significantly, in turn likely to force the RBA to keep raising interest rates.
Economist Leit van Onselen wrote last week the rental market will continue to shrink due to a projected influx of skilled migrants, coinciding with a slowdown in new housing construction due to a sharp rise in costs.
“The size of the (old) ABS rent was way behind and (didn’t) reflect the true state of the market,” he wrote.
According to CoreLogic’s latest home value index released Tuesday, rents rose an average of 0.6 percent in October, leading to a 1.1 percent increase in rents.
Research director Tim Lawless said the trend towards higher rent growth across the property sector was evident in most capital cities and markets across the rest of the state.
“This demand for medium and high density housing can likely be attributed to a shift in rental demand towards more affordable rental options, as well as additional demand from overseas migration, which tends to boost inner-city rents, particularly in Melbourne and Sydney,” he said.
“Broader, the pace of rent growth is slowing, with the nation’s smooth quarterly rate of rent growth falling from 3.0 percent in the three months ended May 2022 to 2.1 percent in the three-month period with the highest rent growth.
“A gradual slowdown in rent growth amid low vacancies could be an early sign that renters are hitting an affordability ceiling.”
Tuesday’s interest rate hike is the RBA’s latest attempt to reduce inflation.
But many households are looking down as they struggle to make mortgage payments.
Finder head of consumer research Graham Cooke said the November increase would be a heavy burden as more than $9,000 was added to the annual cost of a $500,000 mortgage.
“The RBA has been absolutely clear that its main priority is to suppress inflation. After six hikes, inflation is at a 30-year high.” he told NCA NewsWire.
“More rate hikes are likely to be on the way.”
Originally published as Experts warn that rent will remain high due to inflation
https://www.heraldsun.com.au/business/economy/experts-warn-rent-the-reason-inflation-will-remain-high/news-story/0f609a9e3e2fbd6ad7d8eca42ccd885e
