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Posted: 2023-05-31 06:28:11

Reserve Bank governor Philip Lowe says there is no immediate fix for people struggling in Australia's rental markets.

He says rental vacancies are near record lows in large parts of the country, and extremely strong population growth is making the problem worse.

He says an increase in housing supply is needed, but higher interest rates will help to alleviate some rental pressures in the short term by forcing people to "economise" on their housing.

"The way that this ends up fixing itself, unfortunately, is through higher housing prices and higher rents," Dr Lowe said.

"Because as rents go up people decide not to move out of home, or you don't have that home office, you [get] a flatmate.

"The increase in supply can't happen immediately, but higher prices do lead people to economise on housing. 

"That's the price mechanism at work. We need more people on average to live in each dwelling, and prices do that," he said.

Rent, inflation, and the housing crisis

Dr Lowe made those comments during a Senate Estimates hearing in Canberra on Wednesday.

Liberal senator Dean Smith had asked the governor if he was concerned about rising rents and their impact on inflation.

He mentioned how the RBA had recently warned that the outlook for rent inflation had strengthened, given the strength in recent data and the upward revisions to population growth.

Dr Lowe said the RBA was lifting interest rates to dampen inflation, and inflation was coming down in important areas of the economy, but higher rates were unfortunately driving rents higher, and that was feeding inflation in other areas of the economy.

He said it was a problem because rents were the "single largest" component of the consumer price index (CPI), and the RBA expected growth in rents to be about 10 per cent this year and to remain elevated for some time.

"It's very tough," Dr Lowe said.

"Some people are experiencing bigger increases in rent than that, so it's really hurting some people."

When it comes to the rental crisis itself, Dr Lowe said the underlying issue had to do with supply and demand in the rental market.

He said the problem was being exacerbated by the extremely high level of population growth in Australia at the moment.

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