For every $1 loan repayments increase, renters cop it too

For every $1 mortgage repayments increase, landlords increase rents by 3 cents at most, new research shows. 

Reserve Bank of Australia economists analysed investor tax returns from 2006 to 2019 and found that although rising interest rates have some impact on rents, it’s not the main factor at play. 

“In response to the $850 increase in their interest costs between April 2022 and January 2024, the median leveraged investor would have increased their rent by around $25 per month,” the RBA paper says. 

However, they also noted that landlords rarely lowered rents in response to falling interest rates, which they said is “consistent with rents tending not to fall outside of sharp downturns.” 

Instead of interest rates driving rent growth, the economists – Declan Twohig, Anirudh Yadav and Jonathan Hambur – believe that constrained housing supply is the main factor behind the extreme rental growth seen in recent years. 

Since March 2020, house rents in Australia have soared by an eye-watering 48 per cent, while unit rents have risen by 40 per cent, Domain data shows. 

In contrast, wages grew just 13 per cent over the same period. 

A wide range of economic factors have contributed to this acute supply shortage, including rising construction costs, a dearth of skilled labour, shrinking household sizes, a post-COVID migration comeback, and elevated house prices that are keeping Australians renting for longer. 

The RBA economists noted that although their analysis did not reveal a strong positive relationship between interest rates and rent increases, their study period from 2006 to 2019 “does not include a period where interest rates rose as much as they have in the current cycle”.

“It is plausible that pass-through could be higher when interest costs rise sharply,” they said. “This will be easier to test when data covering the last couple of years becomes available.”