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Rents inflation – Why rents are going up and when they will stop

• Advertised rents have been rising rapidly since late 2020 and currently show few signs of slowing. Rents in the CPI, which reflect average rents paid by all renters, not just the cost of new rental agreements, have now also accelerated. As higher new rents continue to be reflected in the stock of outstanding rents, CPI rents look set to accelerate to around 10% y/y and supporting overall inflation prints well into 2024. Rents will be a partial offset to expected disinflation coming through new dwellings prices within the housing costs component of the CPI.
• In this Weekly, we explore how we got here and seek to distinguish between the current acute challenges absorbing the rapid influx of population growth from the longer-term fundamentals of housing supply. The closed border initially eased housing scarcity, but this was absorbed by fewer people per household and more space per person. This reduction in household size is broadly equivalent to demand for 120k dwellings.
• More recently population growth has surged. The 15+ civilian population has grown 500k over the past year. Much of that is a catch up as the stock of temporary visa holders has rebuilt. Catch up growth seems to have created acute frictional pressures as people look for somewhere to live in a housing market where most dwellings are not subject immediately to market pressures. Only 31% of households rent, and most of them are on existing lease agreements.
• The drivers of rental growth have rotated from the smaller states to Sydney and Melbourne. It will take time before some people who increased housing consumption through the pandemic face price increases that incentivise them to downgrade. But while the adjustment takes time, it is underway. Longer-term, the acuteness of the imbalance will fade as prices and household size adjusts, and the broader domestic backdrop will again grow more important for the rents outlook.

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