The RBA is worried about rental inflation
The latest inflation data from the Australian Bureau of Statistics (ABS) revealed that property rental growth was tracking at 3.6% in the year to July, down from a peak of 7.8%:
However, Cotality’s advertised rents series has risen strongly over the past year, tracking at 5.7% in the year to August across the combined capital cities, amid a tight vacancy rate:
This suggests CPI rents (the ‘stock’ of rentals) could re-accelerate as it catches up with the flow of advertised rents.
Rents in Australia currently comprise around 6.6% of the CPI basket, suggesting they have a significant impact on overall CPI inflation.
In a fireside chat this week with John Kehoe at the AFR Property Summit, RBA Assistant Governor (Economic) Sarah Hunter suggested that the RBA was concerned about rental growth. Below are extracts of her commentary around rents:
“We’re definitely paying very close attention to rents. It’s a key component in the CPI, and what we’ve seen in recent years is that the pace of rents growth has been a fair amount higher than it was pre-COVID, and it’s been part of the inflation story, and it’s one of the categories that we monitor and we talk about pretty frequently”.
“Rents really is a product of what happens in very local markets, actually. It’s the balance of demand and supply in those markets, and then rents will come through. And then obviously, you can aggregate that up to city, state, and national level as an average”…
“But we’re certainly alive to the rents channel. It’s one we pay close attention to”…
“In the context of inflation more broadly and rents in particular,… we have with a country with pretty strong compared to other countries, population growth”…
“So in the early years of COVID, where we had the border closures and the lockdowns and students couldn’t come into the local economy, we actually saw rents fall in inner Sydney and inner Melbourne around the universities. Fall quite sharply because that demand was taken out, if you like. And then when we reopened and the students came back, those rents started to rise quite rapidly. So I like that as a recent example of how you can see those kind of effects in some rental markets”…
The contrast with New Zealand is stark. New Zealand’s population growth has fallen sharply amid a decline in net overseas migration.
Chart from Justin Fabo at Antipodean Macro
As illustrated by Justin Fabo from Antipodean Macro below, rents have a larger 10.8% weight in New Zealand’s CPI, and weak rent inflation has been a key drag on Kiwi inflation:
Chart from Justin Fabo at Antipodean Macro
However, recent growth in rents from newly lodged rental bonds suggests that CPI rents may have bottomed out in New Zealand.
Of course, Canada’s recent negative net overseas migration has also driven a 23-month decline in annual asking rents, which would also be placing significant downward pressure on Canadian CPI inflation:
Clearly, running a lower, more sustainable immigration program would take the pressure off Australian inflation via the housing market.
