Real estate investors gain as rents stay higher for longer
Surging rents across many developed economies are proving to be a stubborn hurdle for central banks as they struggle to nail down inflation once and for all this tightening cycle.
In the US, UK, Canada and Australia, rapidly rising housing costs — which have a hefty weighting in consumer price index baskets — are preventing inflation from declining closer to central banks’ targeted levels. The danger is that workers will demand even fatter pay checks to deal with the cost-of-living squeeze, undermining the inflation fight even further.
The upshot: The disinflation momentum seen through most of last year has all but stalled in some developed economies. That’s leading financial markets to either push back bets for interest-rate cuts, as seen in the US, or reinstate odds for further rate hikes, as is the case in Australia.
“Rents, like inflation, are a bit of a lagging indicator of the economic cycle and will be one of the last things to turn down,” said Shane Oliver, chief economist at AMP Ltd. in Sydney. The problem is far from uniform and less of an issue in continental Europe, Oliver said, and worse in countries with rapid immigration programs and building shortages.
Australia meets both those criteria. Reserve Bank Governor Michele Bullock on Tuesday said strong immigration in recent years has “certainly added pressure on the housing market and that’s working its way out in rents.” The RBA, in its quarterly update of economic forecasts released the same day, said rent inflation is expected to “remain high” through at least mid-2026.
The decline in core inflation seen in Australia since early 2023 has come to an “abrupt halt,” in part due to rising rental costs, said Phil Odonaghoe, an economist at Deutsche Bank AG.
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