Recent research by the Reserve Bank of Australia (RBA) has debunked the myth that landlords are passing on increased mortgage costs to tenants, leading to unsustainable rent increases.
RBA economists Declan Twohig, Anirudh Yadav and Jonathan Hambur conducted a study using tax return data from Australian property investors between 2006/07 and 2018/19.
They found that on average, for every dollar increase in their mortgage interest costs, investors increase their rents by one cent.
This revelation comes amid a period of significant interest rate hikes, with the RBA raising the cash rate from 0.1 per cent to 4.35 per cent between April 2022 and January 2024.
The study found that despite a median monthly interest payment increase of $850 for leveraged investors during this time, the corresponding rent increase was minimal.
“Our estimate suggests that this $850 increase in interest costs would have raised rents by less than $10 per month, or just over $2 per week,” the study said.
“We find little evidence of direct pass-through from interest costs to rents.”
Founder & CEO of Freedom Property Investors, Scott Kuru, said it’s a common misconception that when the central bank puts up interest rates to slow inflation, landlords with variable mortgages see their interest bills go up, and so pass on rate increases to their tenants in the form of higher rents.
“The findings are truly extraordinary and completely shoot out of the water claims by political parties such as the Greens that landlords are “greedy” and have been “rent gouging”.
“I’d love to know how recouping an extra one-hundredth of your cost-base burden is considered ‘greedy’.”
The RBA study puts the rapid rent increases to a housing shortage amid high population growth coming from mass immigration and smaller households.
“The central bank says the main reason rents have risen quickly over the last three years or so is because there’s not enough housing supply to meet demand,” he said.
Mr Kuru said that the findings support the continuation of negative gearing policies:
“What the RBA research also implies is that rents would become totally unaffordable if tax breaks like negative gearing were abolished,” he said.
He warned that without negative gearing, “the only way many landlords could survive would be to pass on their full holding costs to tenants.
“If that was the case, you’d be seeing landlords selling up in droves and rent increases of perhaps 50-100 per cent,” he said.
