Did you know the current rental crisis is actually making the Reserve Bank of Australia's (RBA) job more challenging? This situation is ripe with opportunities for property investors like you. Here’s why.
Understanding the Crisis
Australia is facing a housing affordability crisis that’s driving a surge in rental costs, underpinning inflation for at least the next two years, according to Jarden Securities. With surging migration, record-low rental vacancies, subdued housing investment, and a tight labor market, we’re seeing the strongest rental price growth in decades.
While many financial institutions, including the big four banks, expect the RBA to cut rates in November if inflation continues to fall and the economic downturn gathers pace, Jarden highlights that the rapid increase in rents will limit the fall in inflation. This poses a "challenge" for the RBA as it aims to lower inflation to its 2-3% target range.
Why This Matters
The cost of rent has soared more than 30% since 2019. The Australian Bureau of Statistics reported a 7.8% year-on-year rise in the cost of rent for the March quarter—the strongest rise since 2009. Jarden’s chief economist, Carlos Cacho, expects this category to accelerate to 10% this year before falling to 8% next year.
With rents being the second-largest item in the Consumer Price Index (CPI) basket, this is likely to maintain upward pressure on inflation, presenting a continual challenge for the RBA.
The Bigger Picture
RBA assistant governor Sarah Hunter recently noted that there's no "quick fix" for the housing crisis. An imbalance between the supply of new housing and the growing demand is pushing up rents and construction costs. Until new supply comes online, strong housing demand will keep putting "upward pressure" on rents and prices.
Jarden’s Mr. Cacho explains that the imbalance between demand and supply is now the key driver of rent increases. Before the COVID pandemic, cities like Sydney, Melbourne, and Brisbane saw very subdued or even negative rent growth due to a surge in unit construction. Today, the opposite is occurring—record-low rental vacancy rates and surging rents are partly a catch-up.
Key Statistics
Net Overseas Migration: Australia has seen net overseas migration of 750,000 since June 2022, further increasing demand.
Household Size: A fall in household size from 2020 to 2022 increased demand for dwellings by 120,000. An increase in average household size could play a part in managing higher rents and challenging affordability.
Investment Outlook
Jarden expects the annual growth rate of market rents to slow to 8.5% this year and 4.3% in 2025. Given the lag between market rents and rents within the CPI, it will take about 18 months for a slowdown in market rents to reflect in the CPI. Jarden predicts CPI rents to rise 10% over 2024 and 8% over 2025, adding significant pressure to inflation.
RBA’s Economic Forecasts
The central bank predicts that consumer price index inflation will almost hit the midpoint of its inflation target by mid-2026. Jarden expects the RBA to cut the cash rate three times between May next year and the end of 2025, lowering it to 3.6%, aligning with Jarden’s estimate of the "neutral" policy rate.
Opportunity for Property Investors
For property investors, this rental crisis presents unique opportunities. With rental demand surging and supply lagging, rental properties are becoming more valuable. Strategic investments now could yield significant returns as the market adjusts.
Curious about how you can capitalize on these trends? Talk to Oli today to explore how you can navigate the current market and make informed investment decisions.
Source: The Australian
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