I have warned repeatedly that surging Australian property rents would place upward pressure on the Consumer Price Index (CPI) in 2023, causing the Reserve Bank of Australia (RBA) to respond with higher interest rates (other things equal).
The next chart from AMP Capital’s chief economist, Shane Oliver, illustrates the problem.
It shows that asking rents (as measured by SQM Research) have decoupled significantly from overall rents (as measured by the ABS and used to measure CPI):
The below chart from NAB, which plots CoreLogic’s asking rents series against CPI rents, tells a similar story:
The ABS’ recent explainer on rental measurements noted that strong growth in asking rents will lift CPI rents higher over 2023. In turn, rents will add directly to Australia’s inflationary troubles in 2023.
“Price changes observed in advertised rents series are expected to eventually flow through to the CPI Rents series”, the ABS explained. “However, the small share of rental properties leased to new tenants each quarter means that it takes some time for changes in advertised rents to impact price change observed in the CPI Rents series”.
The ABS used a bathtub of water to explain the relationship between asking rents and overall CPI rents.
“The water in the tub represents all rents being paid by households, while the water entering the tub from the tap represents new rental agreements. The CPI series is measuring the overall temperature of the bathtub whereas an advertised rents series measures the temperature of the water flowing into the tub”.
“It will take some time for the flow of water to change the overall temperature of the water in the bathtub”, the ABS explained.
So, with overall CPI rents only growing by 4% over the 2022 calendar year, versus double-digit growth in asking rents, there is still a long way to go before overall CPI rents catch up with the actual market.
And with residential housing rents comprising around 6% of the overall CPI basket, rents alongside utility bills will be the main pressure points in the RBA’s fight against inflation.
The RBA is also working against the Albanese Government’s ‘Big Australia’ immigration policy, which will see record numbers of migrant renters flood the market this year and next, placing further upward pressure on rental inflation.
