RBA flags inflation concern over tighter rental squeeze

Renters are already feeling the squeeze but population growth and sluggish home building could push prices even higher.

Low vacancy rates and strong demand have already sent capital city rents soaring nearly 12 per cent in the last 12 months.

The Reserve Bank warns prices are only expected to rise.

In its latest statement on monetary policy, the RBA pointed to a shortfall in housing supply combined with higher demand from population growth triggered by the reopened borders keeping pressure on rents.

Despite persistent sources of inflation, members of the central bank’s board still believe the can hit the top of its inflation target by mid-2025.

The RBA foresees inflation cooling off more quickly in the near term and falling to 6.25 per cent in June, down from predictions of 6.75 per cent.

This is mainly because goods inflation is easing quickly as global price pressures recede.

But the statement outlined a range of uncertainties dictating the pace of price decline, including the possibility of even more heat in the rental market.

Home building is likely to take a while to respond to population demand pressures and it might also take a long time for people to move into bigger share houses or back in with their parents after households opted for more space during the pandemic.

The thinking is higher rents will push people to form larger households, but the RBA says it’s not clear how much more expensive rent will need to get for this to happen.

The RBA listed a few other reasons to believe inflation could prove more stubborn than expected, including weaker-than-expected productivity growth, a stronger wage-price feedback loop, and firms keeping their prices high even as costs fall.

“On the other hand, inflation could turn out to be lower than expected if the easing in goods inflation is faster or more widespread than anticipated, including because consumer spending is weaker,” a statement from the central bank said.

The RBA painted a picture of slightly weaker growth compared to earlier forecasts, driven by sluggish consumption, as well as modestly lower wage growth and a minor uptick in peak unemployment.

Lending data released by the Australian Bureau of Statistics also revealed the first lift in borrowing in 14 months as buyers leapt back into the property market.

A 12.3 per cent rise in the value of first home buyer borrowing in March fed into the overall 4.9 per cent rise in new housing lending.

Despite the improvement, it was still 22 per cent lower than a year ago.

Mortgage holders also went hunting for better deals, with $21.22 billion worth of loans refinanced throughout the month.

– BY POPPY JOHNSTON/ AAP