Have we seen the peak?

We have all been witness to the fact that even the most eminent experts in the field of economics have struggled with predicting market behaviour over the past few years.

But what is actually happening now and what are the latest forecasts?

It appears inflation is moving past its peak which means the RBA is nearing the end of this rate hike cycle that began last May. So much so that the major banks are now anticipating an actual reduction in the cash rate through 2024.

In the interim, whilst rates were on a one-way trip north, we have experienced a spike in both property and rent values that no one foresaw despite the conventional relationship between them.

So how are rents and interest rates related?

Rents and interest rates move together over time, so a peak in the cash rate may indicate that growth in rent values is also at (or near) a peak. Higher interest rates mean investment property becomes less attractive, which could slow the delivery of new rental stock coming to market, and this could push rents higher. Furthermore, the uptick in rents over the year to September 2017 may be the result of temporary restrictions on investment lending from APRA in late 2015. Rental supply dropped off in 2019 as housing markets went through a broad-based decline, and investor interest in property waned.

Although some investors may have increased rents over the past year to help fund higher mortgage costs, it’s unlikely they have been increased to the full extent to cover the difference. The number of negatively geared properties is close to 50% of the total which would indicate there is a shortfall in income versus outgoings.

However, as with properties for sale, the asking price for rent may be increased to meet your needs but the determining factor on market rent is supply and demand. The less properties available, the more competition to secure them and the more upward pressure applied to the dollar value.

Interestingly, there was a tightening in the rental market well before interest rates started to rise. The rental market started to tighten in mid-2020, while the cash rate wouldn’t go up for another two years, due in part to investor uncertainty, less share-housing, and higher income growth. Higher interest rates have slowed investment activity through 2022, and the first few months of this year, but they haven’t been the sole cause of rental increases.

According to CoreLogic, rent growth is expected to slow in 2024 for a number of reasons:

• As renting becomes less affordable, tenants may turn to re-forming share-houses, which will reduce rental demand.

• Construction cost increases are easing, and fewer approvals means the construction space may also unwind next year. As the elevated pipeline of residential dwellings under construction are completed, renters who may have been waiting for new homes to be completed can exit the rental market.

• 2024 may see a lift in rental supply from government initiatives around social and community housing provision, and build-to-rent projects will gradually flow into the market.

• Housing finance data shows investors are already returning to the housing market, and this bounce-back is likely to be stronger in 2024 if interest rates decline and home values continue to rise. Investor activity is ramping up, coinciding with the start of a recovery in the CoreLogic national Home Value Index through March.

Meanwhile, back to sales, it appears that sellers are trying to get ahead of the curve so to speak. The number of property owners who have held their property for a relatively short period is on the rise, indicating that some may be anticipating coming off fixed-rate mortgages and trying to avoid the proverbial cliff. Property resales within two to three years usually occur during boom times when property owners are ‘playing’ the market for capital gain. While mortgage defaults and arrears remain low, stock levels are slowly starting to nudge up and these metrics may point to a flattening of prices in the last quarter of the year.

The RBA has announced Michele Bullock as the new governor to replace Philip Low in September. As next month’s board meeting takes place within this handover period, I don’t think there will be any movement in the cash rate but for some that threshold may have already been surpassed.