The truth about rent increases

One of the narratives floating around lately is that high interest rates are driving up rental prices. The idea is that because investors are paying more in borrowing costs, they’re passing those increased expenses on to renters.

While this reasoning seems logical on the surface, it doesn’t fully capture how the rental market operates.

Rental prices are primarily driven by supply and demand. Most of the fluctuation happens on the demand side—how many people are looking for homes and what they’re willing to pay. While interest rates might have a marginal impact, the reality is that most estate agents are pricing their rentals based on the market, not their personal financing costs. They set rents at what the market will bear, regardless of the debt level of the owners.

The Reserve Bank of Australia (RBA) recently weighed in on this, essentially saying, “Don’t blame us for higher rental prices!” In a recent report, they acknowledged a correlation between interest rates and rental inflation but made it clear that correlation does not equal causation.

In fact, the RBA found that for every $1 increase in home loan interest repayments, rents only rose by about 1¢. This analysis was based on 13 years of investor tax returns, covering the period from 2006-07 to 2018-19.

To provide some context, the median monthly interest payment for investors rose by about $850 between April 2022 and January 2024. Yet, according to the RBA’s calculations, this increase in borrowing costs would result in a rent hike of less than $10 a month, or just over $2 a week.

Even under the RBA's largest estimate, the pass-through effect is minimal, with rents rising by only 3¢ for every $1 increase in mortgage repayments.

So what’s actually driving rents? A much better indicator is the vacancy rate. This has a strong correlation with rental prices. When there’s a scarcity of available rentals, prices go up. The tighter the rental market, the more agents will charge.

As an investor, I’d love to say that when my borrowing costs rise, I can just pass that on to tenants. But that’s not how it works. Like most landlords, I’m a price taker. Tenants pay what the market dictates, and if those rents don’t cover my costs, that’s a risk I take as part of investing.

In the end, it’s the dynamics of supply and demand that set rental prices, not interest rates. While borrowing costs can add pressure to investors, they don’t directly translate into higher rents. As much as we might want to believe otherwise, interest rates have very little to do with rental pricing.

We are still suffering the financial effects of the covid madness, where governments around the world blindly followed WHO directives to close down the world because of an annual influenza outbreak.

In Australia we also suffered some 'unusual' and extreme weather events which took out some supply chains for vaying amounts of time. The mining boom further exacerbated the construction slow down, by taking a considerable number of workers away from the industry.

It is anticipated that we will not get back into a 'normal' rythm in the building industry much before 2028. This hiatus has caused a lot more than a simple slow down in new starts. It has forced us to look at the types of homes we live in and build, both in size and materials used.

One thing can be said for certain, things will never be the same again.

If you would like help with a project of any size, contact us here - client@thewomandeveloper.com