The Reserve Bank of Australia’s (RBA) Minutes of its December Monetary Policy Meeting notes that soaring residential rents are becoming a key driver of Australia’s inflation.
The Minutes note that “rent inflation continued to rise sharply”, and “that rental markets remained very tight and this was flowing through to growth in CPI rents”.
The Minutes also state that the RBA expects “further large increases in rents expected over coming years as population growth [read immigration] picks up”.
According to the Australian Bureau of Statistics’ (ABS) September quarter CPI release, property rents grew by only 2.8% year-on-year, which was less than half the headline rate of inflation of 7.3% in the year to September 2022:
By comparison, all private sector measures of advertised rents are recording double-digit rental growth nationally on the back of record low rental vacancies.
For example, CoreLogic reported 10.2% national rental growth in the year to November off a rental vacancy rate of only 1%. This was led by the combined capital cities, where rents rose by 10.7% year-on-year:
The ABS measures rents paid across the combined capital cities, whereas CoreLogic and the other data providers measure newly signed rents only.
Therefore, the soaring advertised rents reported everywhere will soon drive CPI higher as the ABS’ rental series finally catches up with the actual market.
The upshot is that rents will fan Australia’s inflationary flames in 2023, which will pressure the RBA to hike interest rates further (other things equal).
Moreover, the record immigration expected in 2023 could actually make Australia’s inflation worse through the rents effect; although the rapid expansion in migrant labour supply should also depress wages. So, it will depend on how these two countervailing forces balance out.
