Will Dropping Interest Rates Reduce the Cost of Rentals?

by Perry Beebe

Recent reductions in the official interest rate have been welcomed with relief by struggling sectors of the economy, and all eyes are now on a range of economic indicators that will soon show if there is any sign of a recovery in our "two-speed" economy. The retail sector is holding its breath waiting to see if consumers are ready to spend again, but manufacturing is burdened with a high Australian dollar that makes it uncompetitive in the export market. The mining industry is thriving in Queensland and Western Australia and drawing skilled workers from others areas of the economy, while in other states, workers are losing their jobs as businesses close.

These contradictions serve to illustrate that even in good economic times, not everyone is sharing equally in the benefits, and nowhere is this more pronounced that in the rental market. Keeping the economy in balance is more complex than the media headlines would have us believe, and simply lowering interest rates is not enough to see a corresponding reduction in rents. There are other factors at play within the real estate industry that need further explanation.

The housing industry generally was hard hit by the GFC resulting in a huge reduction in housing starts, both for occupation by owners and for the rental market. At the same time, our population is increasing, and every year there are more and more people looking to set up their first household, usually by renting. The housing industry is still struggling and recovery is patchy, so the number of new properties reaching the market is still below demand levels. This is a classic supply and demand scenario. When demand is high and supply is low, the price of the commodity will rise, whether it's bananas, fuel or residential rents.

New home construction is a key driver of the Australian economy, and has a major flow-on effect through most other industries. When it slows for whatever reason, there are fewer properties available for people to buy or rent. Historically, that would normally mean that property prices increase, but the opposite is happening as a result of the fear of debt that is still lingering from the GFC. So, while property prices are stagnant and there is reduced demand to purchase, rent prices are rising due to the lack of supply of rental properties.

Lowering interest rates in this economic scenario will do little in the short term for the person trying to rent an affordable property. However, as the reduced interest rates move through the economy, a reasonable expectation would be that new housing construction will pick up, consumers will loosen their purse strings and start spending, and with new properties coming onto the market, there should be more available for rent. Whether that will drive rental prices down, only a crystal ball will tell.

About Perry Beebe Perry is the Managing Director of All Residential Real Estate. All Residential Real Estate is a boutique agency passionate about providing very high levels of customer service. We believe that property sales and management is about you. It's about how you feel when you sell your property or have a property managed through an agent. At All Residential Real Estate, you have very experienced professionals who take pride in everything they do.   You can also find Perry in Google+