Where will rental prices go if interest rates remain steady during the second half of 2023?
The Australian real estate market has been a topic of much discussion given the recent surge in residential rental prices following rises in property values through much of the covid era. As we're all aware, the Reserve Bank of Australia has taken steps to cool the market by raising interest rates multiple times during the past year and that has indeed arrested the rate of property value increases in many parts of the country. In this context, those in the rental market (particularly those with leases due for renewal in the near future) are understandably curious as to where rental prices will head if interest rates remain steady for the rest of the year.
Before we continue, it's important to know in advance that this is largely a speculative exercise and you should not make investment decisions based on the information presented within the blog post. Currently, the RBA has hinted that we may be due for more interest rate rises if inflation remains above the target range, while some economists are projecting that the RBA has moved too quickly and will need to reduce rates to avoid a recession in the near term, so there are no guarantees in the market. The purpose of this blog post is to evaluate some key indicators and to make an educated estimate as to possible market movements in late 2023.
The Peak in Interest Rates: An End to Rising Rents?
According to a data from CoreLogic (article link - July 2023), the rolling annual rental growth rate - while still higher than historical averages - has started to decline from its peak. While different parts of Australia are at different stages in this growth cycle, due to differing supply and demand rates among other macro and micro-economic factors, Australian rental rate growth overall seems to have peaked in November 2022 and retreated slightly since. If we are also now seeing a peak in interest rates, this might signal an end to the period of rapidly rising rents. Historically, interest rates have played a vital role in influencing property prices and rental markets. Higher interest rates make it harder to borrow money and increase costs borne by investors, which often triggers increases in rental prices as landlords attempt to cover higher expenses and as would-be buyers turn to the rental market - thus placing pressure on supply.
Factors Influencing Rental Prices
1. Supply and Demand Dynamics: One of the most significant factors determining rental prices is the balance between supply and demand in the rental market. If demand outstrips supply, as seen in recent times with population growth and housing shortages, rental prices are likely to rise.
2. Economic Conditions: The overall economic conditions of the country also play a crucial role. A strong economy with robust job prospects can lead to higher demand for rental properties, potentially causing prices to increase. Similarly, if costs or availability of materials and labour are stretched (as occurred with many building products and services in 2020-2022), those factors can increase the costs of new building stock and therefore increase demand for existing builds.
3. Interest Rates: As mentioned earlier, interest rates can significantly impact the real estate market. Steady interest rates could mean less volatility in property prices, and in turn, may stabilize rental costs.
4. Government Policies: Government policies related to property and housing can also affect the rental market. For instance, measures to increase housing supply may help alleviate rental price pressures.
5. Investor Activity: The level of investor activity in the market can influence rental prices. Increased investor interest might lead to higher rental costs if they seek higher returns on their investments.
Expert Opinions and Market Indicators
While the CoreLogic article, drawn from RBA data, suggests that the peak in interest rates could signal an end to rapidly rising rents, it's essential to consider other expert opinions and market indicators.
Some economists argue that the rental market's dynamics are not solely dependent on interest rates. They emphasise that other factors, such as supply shortages, public policy decisions (such as Queensland's new rental stability legislation, negative gearing taxation treatment, first home buyer incentives and the like), as well as population growth and workplace trends (such as the movement towards remote working), are equally, if not more, critical in determining rental prices.
Will Rental Prices Rise, Plateau or Fall?
Given the complexity of the real estate market and the multitude of factors at play, it is challenging to make precise predictions. However, with interest rates broadly expected to remain steady or to move only slightly in the back-half of 2023, we might see some moderation in the rate of rental price increases. If other factors, like increased housing supply, domestic migration, co-living agreements and government policies, support this trend, rental prices may plateau or even experience a slight decline in certain areas.
The Australian real estate market, including residential rental prices, is influenced by a multitude of factors, with interest rates being a significant one. The recent probably peak in interest rates might signal an end to rapidly rising rents, but it is important to consider other factors such as supply and demand dynamics, economic conditions, and government policies.
As an investor or potential tenant, it is crucial to stay informed and seek professional advice before making any decisions. While steady interest rates may bring some stability to the rental market, predicting its future trajectory remains uncertain. Whether rental prices plateau or fall will depend on the interplay of various market forces, and only time will reveal the true outcome. Based on the data from CoreLogic and the RBA, it does appear increasingly likely, though, that the most rapid rates of increase are now in our rear-view mirrors.
Disclaimer - This blog post is for informational purposes only and not intended as investment advice. The future of the Australian residential rental market is subject to various unpredictable factors. Readers should consult with professional advisors and consider their individual investment goals and circumstances before making any real estate or investment decisions.