I have been warning for months that Australia’s soaring residential asking rents, which are rising at a record double-digit rate nationally, will apply significant upward pressure to the Consumer Price Index (CPI) in 2023.
Asking rents soar across Australia.
In turn, this soaring rental inflation will pressure the Reserve Bank of Australia (RBA) to lift interest rates further, or at least keep rates on hold for longer (rather than cutting).
The reason is summarised in the below NAB chart, which shows that asking rents (as measured by CoreLogic) have decoupled massively from overall rents (as measured by the ABS and used to measure CPI):
Record gap between asking rents and overall rents.
The ABS recently posted an explainer on how the hyperinflation in asking rents will gradually drive CPI rents higher, thereby adding to Australia’s inflationary pressures in 2023.
“Price changes observed in advertised rents series are expected to eventually flow through to the CPI Rents series”, the ABS explains. “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 uses a bathtub of water to explain the interplay 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”.
On Wednesday, the ABS released the December quarter CPI, which showed that overall rents are now rising quickly, from 0.4% in the year to December 2021 to 4.0% over the 2022 calendar year:
CPI rents are now rising fast.
This is only the beginning of the CPI rent inflation, which still has a long way to go to catch-up with the record growth in asking rents.
Given residential property rents comprise around 6% of the overall CPI basket, rents alongside utility bills will become the main thorns in the side of the RBA’s fight to contain inflation.
This rental inflation will also be made worse by the Albanese Government’s record immigration, which will add hundreds of thousands of renters to demand in 2023 and beyond.
