In the more than two-and-a-half years since the pandemic first began impacting Australia, many things have changed dramatically. Things have turned out very differently than one would have expected at first glance.
At the onset of the pandemic, it was widely thought that demand for housing would fall as the economic costs of Covid hit household budgets and net overseas migration went into reverse. In time the opposite occurred. Despite the expected headwinds, Australians left share houses in droves and changing internal migration patterns sent demand for rental accommodation rocketing.
To put this demand into perspective, between August 2009 and the end of December 2020, the asking rent of homes in the nation’s capital cities rose by 11.3 per cent, according to data from SQM Research. Since the start of 2021, capital city asking rents have risen by 24.8 per cent, including a whopping 20.1 per cent in the past 12 months alone.
As crazy as it may sound, the past 12 months have effectively seen roughly two decades of growth in asking rents crammed. This has generally been a huge boon to landlords, as was the Reserve Bank cutting the cash rate to just 0.1 per cent up until rates began rising in May.
But there is a downside to this enormous rise in asking rents, it will eventually feed into the inflation data putting upward pressure on headline inflation. If this proves to be a factor in keeping inflation above the RBA’s 2 per cent to 3 per cent target, it could cause interest rates to go higher than they would otherwise.
According to the latest inflation reading from the ABS, rental price inflation is running at just 1.6 per cent across the nation’s capital cities.
How does SQM stack up against the ABS measure of rents and other private data providers?
While they technically measure different things, actually quite well. The SQM data series measures asking rents for properties seeking tenants, while the ABS data measures all rents in aggregate.
As this analysis from IFM Economics Chief Economist Alex Joiner shows, the data of private providers such as CoreLogic and SQM tend to be a leading indicator for where the ABS series will head in the coming months and years.
According to housing market data provider CoreLogic, in the 12 months to August asking rents in the nation’s capital cities have risen 10.0 per cent, led by Brisbane where the market is up 13.3 per cent.
What does this mean for inflation?
As it stands rents only contribute 0.1 per cent to the headline rate of inflation of 6.1 per cent. Part of this is due to the fact that the ABS weights rents as just 6.23 per cent of the headline consumer price index.
The other part is that as of the last data release which covers up until the end of June, the ABS has capital city rents rising by 1.6 per cent.
But what if the CoreLogic or SQM figures feed into the headline inflation rate as data suggests they eventually do, bar some sort of reversal in the fortunes of the nation’s capital city rental markets.
If we were to impose Corelogic’s figure on the rental component of the CPI over a 12-month period, the Consumer Price Index (CPI) would be 0.52 per cent higher than it is today. Doing the same for the SQM figure, would see inflation sit 1.18 per cent higher than where it is currently.
When contrasted with the historic impact of rising rents on the CPI, Corelogic’s figures feeding into the CPI would see the highest contribution since the June quarter of 1989, based on today’s weighting for rents in the CPI.
If SQM’s figures were to feed into the CPI, the impact would be off the charts, eclipsing anything seen since comparable data began in 1973.
Making the RBA’s job even harder than it already is ….
In the past five RBA meetings, Australians have seen mortgage rates rise by their largest relative degree in Australian history, in terms of a single rate rise cycle.
Yet despite this swiftest tightening of monetary policy, so far it’s not having the desired effect. Retail sales are still roaring along and price pressures remain extremely high according businesses surveyed by the National Australia Bank.
When the enormous growth in rents starts feeding into the headline inflation figure, the RBA’s challenge of getting inflation back below 3 per cent becomes that bit more difficult. But there is also another factor that complicates things significantly, the lag.
As it stands the ABS rental price inflation data has seen minimal signs of the same price pressures seen in releases from private data providers. If the current lag between rises in asking rents and rises in rents in aggregate as measured by the ABS continues, it could be a year or more before the current degree of price pressures show up.
If inflation was to come down next year as is widely tipped, the legacy of the skyrocketing cost of rental accommodation that has occurred over the last 12 months may blunt the impact of a declining rate of inflation.
This could mean higher rates for longer, as recently tipped by ANZ, who suggested it could be the second half of 2024 before rate cuts are considered.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator