RBA shows surprising amount of empathy for renters

It is popular to bash the Reserve Bank of Australia (RBA) as distant and uncaring about the plight of the average Australian as it continues to rely on raising interest rates to reduce inflation.

However, some interesting research by our central bank has shone a very necessary spotlight on the very real issue of rental stress.

Interestingly, given the concentration on mortgage stress due to rising interest rates, the RBA’s research shows that financial counsellors were getting more calls from people in the private rental market who were under financial stress.

Speaking at the National Press Club, RBA Governor Dr Philip Lowe said: “A lot of those calls, interestingly, are coming from people who rent. Rental stress is at least as big an issue at the moment as mortgage stress.”

Interest rates hitting rents but other pressures remain

Of course, some of that rental stress has been caused by the 10 rises in official interest rates to the current 3.6%, with landlords trying to offset rising loan repayments by increasing the rent they charge.

However, the rental issue is more complicated than that with the pressure of record immigration and a dysfunctional building sector that has seen several large companies suddenly collapse adding immense pressure.

In some ways renters are over a barrel with landlords safe to impose large rent increases, knowing that if a tenant leaves, there will be a large queue of new and desperate replacements forming outside the door.

In these circumstances and given the high costs of moving and difficulties in finding a new place to live, is it any wonder that many renters are deciding to pay up higher rents rather than throw themselves on to the street.

Rental pressures may take much longer to solve

Indeed, these rental pressures look set to continue long after the mortgage crisis has eased, most likely by interest rates remaining steady or even falling.

Interestingly, Dr Lowe said that rental market pressures, which are expected to last for years as population growth outstrips increases in housing supply, could also significantly influence the inflation figures.

It is easy to see why with rents up 10.1% in the year to March and still rising across all of the major cities, according to CoreLogic.

Vacancy rates remain very low at 1% and the number of available rentals across the country in the four weeks to April has fallen below 95,000 – a 36% drop below the previous five-year average.

Dr Lowe said the reopening of the international border was boosting population growth, which would soon reach 2%.

Housing takes a long time to respond

“It takes a long time for housing supply to respond fully to shifts in population growth. In the previous episode of strong population growth during the resources boom, it took nearly five years for housing supply to respond,” Dr Lowe said.

“It’s likely that the balance between demand and supply in the housing market will result in rent inflation being quite high for a while yet, and this will be one of the factors adding to inflation over the period ahead.”

Unfortunately for those keen to see a relaxation on interest rates, Dr Lowe remains very determined to reduce inflation, even if that reduction takes a little longer in Australia due to the RBA’s decision to keep unemployment low.

He remains strongly in the camp that persistently high inflation is very damaging to the economy, eroding the value of savings, pressuring household budgets and having the worst effect on those with low incomes.

“High inflation makes it harder for businesses to plan and it distorts investment. And if inflation becomes ingrained in expectations, it requires even higher interest rates and a larger increase in unemployment to get it back down again.”