We know that falling interest rates were one of the major factors stimulating the “once in a generation” housing boom Australia experienced in 2021, and now there is concern that rising interest rates will slow down house price growth and possibly even cause a housing slump.
But what effect will rising interest rates have on our rental market?
I know that’s a question many tenants and landlords are asking.
While interest rates don’t directly affect rental values, there will however be some indirect consequences pushing up rental rates even higher.
However, let’s start with the fact that Australia is currently facing a rental crisis as national vacancy rates dip to the lowest point on record with most locations around Australia having a vacancy rate under 2%.
In fact, rents for detached houses have risen by as much as 15% over the last 12 months as rental vacancy rates keep falling across all cities for both houses and apartments.
And moving forward opening our international borders will put additional strain on the already tight rental market pushing rents even higher.
Vacancy rates and interest rates
The influx of migrants will most likely affect Sydney and Melbourne in particular, as these are the most popular tourist destinations.
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But while interest rates drive house price growth or slump the main driver of rentals is vacancy rates, which is really a measure of supply vs demand for rentals.
In other words, landlords can’t put up the rent just because their holding costs including interest rates go up.
If tenants are delivered a steep rent increase, they will simply move if they can find comparable cheaper accommodation elsewhere.
It is often to send that a 3% vacancy rate means our rental markets are in balance, but I believe this is no longer the case in today’s digital economy and that a 2% vacancy rate is a more appropriate measure of a balanced rental market.
What I’ve found is that once the local vacancy rate moves above 3%, and remains elevated for some time, asking rents start to fall as landlords drop their rents to attract tenants.
On the other hand, rents tend not to rise until the vacancy rates fall below 2% and tenants have to compete for accommodation putting landlords in a better position to increase rent.
However, there will be a side-effect of rising interest rates as potential homebuyers will have more difficulty getting loans and this will add extra pressure on our rental markets.