How will rising interest rates affect rental prices?

The Australian rental market is as competitive as we have ever seen it. Those who are not ready or financially able to purchase a property are finding their options for properties to rent considerably lower than in years previous, often having to act quickly and be prepared to pay higher rents to secure a lease.

Now, with interest rates continuing to rise, many renters are wondering how this will impact their selection of properties and the money in their back pockets. In this article, the team at Dynamic Residential explores how interest rates affect the rental market, as well as the other factors that will cause rent prices to rise or fall.

Why are Interest Rates Going Up?

The world is currently in the midst of a cost-of-living crisis. A multitude of global economic factors, such as supply chain interruptions after the COVID-19 pandemic, the war in Europe, and sky-rocketing fuel costs, have led to rapid inflation, placing pressure on families across Australia.

The Reserve Bank of Australia (RBA) is steadily raising interest rates to combat this growing inflation. Doing so makes it more expensive for banks to borrow money, an added cost typically passed onto the wider public via higher mortgage rates. The logic behind this is for households to have less disposable income on hand, which will drive down discretional purchases, and the demand for goods and services, curbing the inflation we are seeing across most industries.

Do Interest Rates Affect the Rental Market?

Given how the rise in interest rates impacts the cost of borrowing money, renters may initially believe they won’t be affected by these changes, but we need to look at the wider economics of the market to understand the full impact.

The rental market is dictated by supply and demand. When supply outweighs demand, there is less competition for each property, and landlords must drop their rental prices to entice applications from potential tenants. Conversely, when there is a greater demand for a reduced supply of rental properties, competition is fierce, and landlords realise they can increase their rental prices with dozens of desperate renters attending each home inspection.

So, will the rents rise with interest rates in Australia? Well, as the cost of borrowing money is going up, it could prevent new investors from purchasing new properties to increase the supply of rentals on the market. Moreover, existing landlords may pass along their additional expenses within their mortgage agreement to their tenants to maintain previous profit margins.

As a result, the flow-on effects of rising interest rates could raise average rental prices, without a refreshed supply of new properties (especially as migrants and long-term tourists return to Australia from overseas).

With that said, a variety of other factors will impact the supply and demand of rental properties, dictating whether rents will rise or fall.

What are the Other Factors that Will Affect the Rental Market?

State of the Economy

One of the main factors affecting the supply and demand of rental properties in Australia is the state of the economy. When the economy is strong and unemployment is low, people are more likely to have the income and confidence to enter the housing market, either as buyers or renters. Again, this can lead to an increase in demand for rental properties, which can push up rental prices.

Conversely, when the economy is weak and unemployment is high, potential homebuyers and renters may be less able to afford new properties, decreasing demand and lowering prices.

Availability of Affordable Housing

‘Affordable’ housing is a relative term, but in general terms, it refers to how easy it is for Australians on average salaries to enter the property market.

If there is a shortage of affordable housing, more people may be forced to rent more expensive properties than they would like, which can lead to an increase in demand and rental prices. By the same token, a surplus of affordable housing leaves landlords lowering rents to attract tenants.

Government Incentives & Policies

Australia’s economy is largely influenced by the housing sector. As such, there is often a slew of government policies and incentives put in place to stimulate new builds or better opportunities for first-time homebuyers to enter the market. For example, during the pandemic, the government unveiled the HomeBuilder program that would make it more affordable for homebuyers and developers to build new properties, not only creating new jobs within the construction workforce, but also increasing the supply of housing across the country.

Popularity of Particular Areas

There are many subsets within the broader real estate market in Australia. Instead of looking solely at a national or state level, we can focus our attention on the more desirable suburbs in our communities and recognise the individual supply and demand present there.

For example, suppose there is a high demand for housing in a new development located by the beach. In that case, landlords may be able to charge higher rents even if interest rates are falling, as people are willing to pay more for a place to live if there are not many other options available in that area.

Learn More About How Interest Rates Affect the Rental Market with Dynamic Residential

Overall, while interest rates are an important factor in the rental market and can affect rents, they are not the only factor. The supply and demand for housing, the strength of the economy, the availability of affordable housing and a host of other influencers can all play a role in determining rental prices.

If you would like further information or help in finding affordable, high-quality properties for rent, please do not hesitate to contact us at Dynamic Residential today.

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