CoreLogic head of research Eliza Owen said with inflation already past its peak, the Reserve Bank of Australia appears closer to ending its rate-hike cycle.

“Growth in rent values usually tracks roughly with movements in the cash rate —not only is the cash rate expected to peak this year, but each of the major banks is now forecasting a reduction in the cash rate through 2024," Ms Owen said.

“Annual rent growth, while still high, has gradually been trending lower since a peak in December 2022.”

But the question is, how are rents and movement in interest rates related?

Ms Owen said rates and rents move together over time for several reasons, including the latter being an input in measuring inflation.

“When rents rise, inflation can rise, and this prompts the RBA to lift interest rates,” she said.

Another reason is the impact of interest rates on rents — higher rates typically dampen the attractiveness of investment property, leading to a slow delivery of new rental supply, which, in turn, boosts rents.

Was the rent surge caused by the rate hikes?

Ms Owen said investors may have increased rents to help fund higher mortgage costs due to rate hikes.

“But it’s unlikely rents have been increased to the full extent of interest cost increases — ATO tax data from the 2020-21 financial year indicated close to half or around 47% of Australian property investors were negatively geared, meaning rents were not covering interest payments on many investments even before interest rates started to rise," she said.

The cash rate started its uptrend in May 2022 and over the year to June 2023, the monthly median rent has increased $225 per month.

During the same period, mortgage costs of a new investment loan increased by $948, based on the median dwelling value.

However, Ms Owen said it is crucial to understand that other factors affecting investment activity could ultimately lead to a rise in rents, especially in instances when rental supply is affected.

“Looking at rental supply in the context of rate movements it’s clear that a tightening in the rental market occurred well before interest rates started to rise,” Ms Owen said.

“The rental market started to tighten in mid-2020, while the cash rate wouldn’t go up for another two years.

And while higher interest rates have slowed investment activity through 2022, and the first few months of this year, they haven’t been the sole cause of rental increases.

Why rent growth is likely to slow

Still, Ms Owen said there are many reasons that could explain the potential slowdown in the rental market over the next year.

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

Meanwhile, many renters who may have been waiting for new homes to be completed can exit the rental market, especially now that the increases in construction costs are easing.

Rental supply may also take a boost next year from government initiatives around social and community housing provision, and the build-to-rent sector.

On top of this, the latest set of housing finance data is showing the return of property investors, which would likely be stronger in 2024 if interest rates start to decline.

“While national rent values have never seen an annual decline in the CoreLogic series, rent growth is likely to continue moderating — the rental market as a whole is likely to loosen in 2024,” Ms Owen said.