RBA: Interest rate hikes to dampen inflation are offset by rising rents

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In the more than two and a half years since the pandemic began to hit Australia, a lot has changed dramatically. Things turned out very differently from what one might have expected at first sight.

At the start of the pandemic, it was widely believed that housing demand would fall as the economic costs of Covid hit household budgets and net migration abroad would reverse. Over time, the opposite happened. Despite expected headwinds, Australians have left shared homes in droves and changing patterns of internal migration have sent demand for rental accommodation soaring.

To put this demand into perspective, between August 2009 and the end of December 2020, the asking rent for houses in national capitals increased by 11.3%, according to data from SQM Research. Since the start of 2021, asking rents in the capital have increased by 24.8%, including 20.1% in the last 12 months alone.

As crazy as it sounds, the last 12 months have actually seen about two decades of growth in asking rents. This has generally been a boon for homeowners, as has the Reserve Bank which cut the cash rate to just 0.1% until rates start to rise in May.

But there is a downside to this huge increase 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 2-3% target, it could drive interest rates higher than they otherwise would.

According to the latest inflation data from the ABS, rental price inflation is only 1.6% in the nation’s capitals.

How does SQM compare to ABS Rent Measurement and other private data providers?

Although 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 as a whole.

As this analysis from IFM Economics Chief Economist Alex Joiner shows, data from private vendors such as CoreLogic and SQM tends to be a leading indicator of where the ABS series is headed in the months and years. coming.

According to housing market data provider CoreLogic, in the 12 months to August asking rents in national capitals rose 10.0%, led by Brisbane where the market rose 13.3%.

What does this mean for inflation?

Currently, rents only contribute 0.1% to the overall inflation rate of 6.1%. This is partly because the ABS weights rents at just 6.23% of the overall consumer price index.

The other part is that since the last data release which covers until the end of June, the ABS has capital rents up 1.6%.

But what if the CoreLogic or SQM figures fuel the headline inflation rate, as the data suggests, barring some kind of reversal in the fortunes of the capital’s rental markets national.

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% higher than it is today. . Doing the same for the SQM figure, inflation would be 1.18% higher than it is now.

Compared to the historical impact of rising rents on the CPI, Corelogic’s figures feeding the CPI would see the highest contribution since the June quarter of 1989, based on the current weighting of rents in the CPI .

If the SQM figures were to be incorporated into the CPI, the impact would be out of this world, dwarfing anything seen since comparable data began in 1973.

Making the RBA’s job even harder than it already is….

Over the past five RBA meetings, Australians have seen mortgage rates rise to their highest relative degree in Australian history, in terms of a single rate hike cycle.

Yet, despite this rapid tightening of monetary policy, it has so far not had the desired effect. Retail sales are still booming and pricing pressures remain extremely high according to businesses surveyed by National Australia Bank.

When the huge growth in rents starts to trickle down to headline inflation, the RBA’s challenge to bring inflation back below 3% becomes a little tougher. But there is also another factor that considerably complicates things, the lag.

As it stands, 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 the increase in asking rents and the increase in overall rents as measured by ABS continues, it could be a year or more before the current degree of pricing pressures manifests. .

If inflation were to fall next year, as is widely predicted, the legacy of the skyrocketing cost of rental housing that has occurred over the past 12 months could mitigate the impact of a rate falling inflation.

That could mean higher rates for longer, as ANZ recently suggested, which suggested it could be the second half of 2024 before rate cuts are considered.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator


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