Higher rents will help reduce rental stress by encouraging people to ‘economise’ on housing, RBA governor says

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Reserve Bank governor Philip Lowe says there is no immediate fix for people struggling in Australia’s rental markets.

He says rental vacancies are near record lows in large parts of the country, and extremely strong population growth is making the problem worse.

He says an increase in housing supply is needed, but higher interest rates will help to alleviate some rental pressures in the short term by forcing people to “economise” on their housing.

“The way that this ends up fixing itself, unfortunately, is through higher housing prices and higher rents,” Dr Lowe said.

“Because as rents go up people decide not to move out of home, or you don’t have that home office, you [get] a flatmate.

“The increase in supply can’t happen immediately, but higher prices do lead people to economise on housing.

“That’s the price mechanism at work. We need more people on average to live in each dwelling, and prices do that,” he said.

Rent, inflation, and the housing crisis

Dr Lowe made those comments during a Senate Estimates hearing in Canberra on Wednesday.

Liberal senator Dean Smith had asked the governor if he was concerned about rising rents and their impact on inflation.

He mentioned how the RBA had recently warned that the outlook for rent inflation had strengthened, given the strength in recent data and the upward revisions to population growth.

Dr Lowe said the RBA was lifting interest rates to dampen inflation, and inflation was coming down in important areas of the economy, but higher rates were unfortunately driving rents higher, and that was feeding inflation in other areas of the economy.

He said it was a problem because rents were the “single largest” component of the consumer price index (CPI), and the RBA expected growth in rents to be about 10 per cent this year and to remain elevated for some time.

“It’s very tough,” Dr Lowe said.

“Some people are experiencing bigger increases in rent than that, so it’s really hurting some people.”

When it comes to the rental crisis itself, Dr Lowe said the underlying issue had to do with supply and demand in the rental market.

He said the problem was being exacerbated by the extremely high level of population growth in Australia at the moment.

“Rent growth is going to stay high for quite a long time,” he said.

“I think we’re going to see a further pick-up because the rental markets are so tight and population growth is so strong.”

He expressed some dismay at the lack of coordination between policymakers, saying the capital stock in Australia was not growing at the same rate as the population, and it was contributing to these pressures in the housing market.

“We’re going to have 2 per cent more people in the country this year, [but] the capital stock is not increasing by 2 per cent,” he said.

He said the RBA was trying to get inflation down in this environment, and higher interest rates were helping this by dampening demand for all kinds of things, including housing.

And that would help to remove some upward pressure on rents in the short term, he said, by forcing some behavioural changes in the population.

“The way that this ends up fixing itself, unfortunately, is through higher housing prices and higher rents,” he said.

“The higher prices do lead people to economise on housing,” he said.

Higher rents and homelessness

In Launceston, cost-of-living pressures are front of mind for staff and volunteers at the Country Women’s Association (CWA) shop.

The shop accepts donations and works with other organisations to help the growing number of homeless people in the northern Tasmanian city.

Sharon Hutton from the CWA told the ABC there was an entirely new element of homelessness in the area, and it comprised people who were not struggling with other personal issues.

“It’s literally they cannot afford to pay their rent that week, and they are homeless,” she said.

“You’ve got families living in cars … it’s everywhere.”

Ms Hutton said her own landlord recently hiked her rent by $30 a week, but the size of that increase was small compared to what her friends had copped.

“So I had a friend who literally, $150 her rent went up. And another friend, their rent went up $80. That’s a lot a week.”

Ms Hutton said food inflation in northern Tasmania was also a huge problem.

“We live on an island that should be able to support itself with its produce and everything else, and we are paying through the roof for absolutely everything when it’s grown on our doorstep,” she said.

In its recent Statement on Monetary Policy, the RBA said inflation had eased in the March quarter, with goods prices accounting for most of the disinflation.

But the composition of inflation had been changing.

It said non-housing inflation was expected to be slower than forecast in coming months, but this would be offset by a stronger outlook for rent inflation, due in part to higher-than-expected population growth.

Earlier this month, economics professor Ross Garnaut warned that a lack of investment in Australia, coupled with the recent exceptionally strong population growth, meant monetary policy was having a perverse outcome for renters.

“Higher rents feed into a higher CPI, which is interpreted by the RBA as a signal to raise interest rates again,” he said.

“For housing and electricity prices and their large contributions to [inflation] and community concern, raising interest rates does more to raise than to lower prices,” he said.

Monthly inflation rises a little, but the trend is still down

According to new data from the Bureau of Statistics, higher rents did put upward pressure on inflation last month.

The ABS said the annual pace of headline inflation picked up in April, from 6.3 per cent to 6.8 per cent, driven by higher housing costs and petrol prices.

But when excluding items with volatile price movements from the data, the underlying measure of monthly inflation still declined to 6.5 per cent in April, lower than the 6.9 per cent recorded in March.

However, the ABS said price increases for food and non-alcoholic beverages remained high last month.

It said food products (+11.7 per cent) was the main contributor to the annual increase in that component of the CPI, followed by bread and cereal products (+11.4 per cent) and dairy and related products (+14.5 per cent).

That was not news to Mai Dung, who owns a Vietnamese bakery in Melbourne.

“Everything, everything has gone up and it makes us a little bit worried,” she told the ABC.

While she is struggling with her own rising bills, she is worried about scaring away customers by lifting her prices too much.

She said her last price hike was in February, and business was already down 15 to 30 per cent, depending on the day.

“They’re 50 or 30 cents higher than the previous year,” she said of some of her products.

“Hopefully the customers understand,” she said.

She said customers who could still afford to buy lunch out were cutting back on spending.

“Normally they come for a roll, drink, or a coffee and a snack. Now they just come for a roll,” she said.

“They said, ‘I’m so sorry — I used to come here once a week or twice a week, now I only come every two weeks because I have to manage my budget.'”

More rate hikes to come

Economists say there will be more rate rises coming.

Marcel Thieliant from Capital Economics said the RBA might lift rates two more times from here, putting the cash rate target at 4.35 per cent by July.

The cash rate is currently 3.85 per cent.

David Bassanese, the chief economist of BetaShares, said digging below the ABS’s headline inflation data, it still seemed like the recent disinflationary trend in Australia was intact, so the RBA might have a bit more time up its sleeve before it felt compelled to lift rates again.

“Especially given other signs of a cooling economy such as weaker building approvals and consumer spending,” he said.

“That said, there is a growing risk of at least one and possibly two further rate rises in coming months, especially if the resilience in the United States economy — and its own stubborn inflation pressures — forces the US Federal Reserve to embark on further monetary tightening,” he said.

EY chief economist Cherelle Murphy said inflation was still running too quickly.

She said the RBA’s recent forecasts had underlying inflation dropping to 6 per cent by the June quarter, which might not eventuate.

“While this is still possible, any stickiness in prices, upside surprises on rents or wages, and downside surprises in productivity growth will keep that out of reach,” she said.

By business reporters Gareth Hutchens and Rhiana Whitson (Original ABC Article)