On the home front, it is soaring rents that have market watchers worried, with Sydney rents rising 5.3% in the past three months and 3% in the last month alone, figures show. from SQM Research.
After longer lockdowns and a more subdued recovery last year, Melbourne now matches Sydney in rental growth over the past month.
“We are seeing strong increases in capital cities,” said SQM Research founder Louis Christopher, who predicts that combined house and unit rental growth in Sydney will exceed 10% this year.
“It’s accelerating. If you look at what’s happened over the last 90 days, Melbourne is clearly picking up speed, and so is Sydney.
“What we’re going to see is a real acceleration in the CPI this year, driven in part by significant rent increases finally recorded by the ABS in Sydney and Melbourne,” he said.
The problem is how official measures of housing rents are taken – in effect the amounts paid – compared to the more volatile measure of asking rents advertised in the market. Asking rents point the way, although they can be rubbery numbers, as actual rents agreed may be lower or higher than advertised prices.
The RBA identified the problem in its monetary policy statement this month, noting that the gap between advertised rents and CPI rents is “significant by historical standards”.
“Stronger advertised rents should contribute to a pick-up in CPI rent growth in 2022, although the timing and extent of this impact remains uncertain,” he said.
The spike in construction costs, which contributes about a tenth of the CPI basket, was well publicized. They rebounded 4.2% in the December quarter as lumber and steel prices rose on global supply chain issues and the local construction boom.
Rents, which typically represent about 6% of the CPI, rose only 0.1% in the December quarter as measured by the CPI, despite being ahead of the market.
RBA Governor Philip Lowe returned to the theme during a parliamentary hearing on Friday, acknowledging the “possibility that stronger growth in rents could lead to higher inflation.”
“The spike in rents in Sydney and Melbourne has picked up, but the vast majority of rents, the average rent that people are paying, is not moving as fast, and it’s the average rent that goes into the CPI “, did he declare.
“This is something we are watching carefully as in a number of other countries rents have risen rapidly. We saw it yesterday in the US CPI.
For Macquarie’s chief economist, Justin Fabo, forecasting a recovery in rents within the CPI is a “no-brainer” given the weakness of this growth. Wage growth coupled with a rental market that tightens further as people return to the country is believed to be the cause, he said.
“These elements combined should put upward pressure on rents as we capture them in the CPI.”
Vacancy rates in the capital have fallen as available rentals dwindle. Sydney’s vacancy rate has already fallen below pre-pandemic levels.
But, as Tim Lawless, head of research at CoreLogic, notes, there’s a limit to how much rent can go up before affordability constraints kick in. The price ceiling is always firmer for tenants who, unlike buyers, do not have the advantage of accessing credit to finance their accommodation.
“They will start forming larger households or looking for cheaper rental housing around the downtown markets or some of the more affordable outlying markets,” Lawless said.