Interest rates to hit 10%, Sydney rents to jump 50%

Sydney investors are finally on the receiving end of some good news, with rents in the NSW capital set to rise by more than 50% in the next four years. Meanwhile, industry forecasters have tipped that interest rates are likely to go above 10% over the same period.

Economic forecaster BIS Shrapnel painted a picture of doom and gloom for renters at their economic outlook briefing in Sydney this week - but the upside for Sydney landlords is that after a decade of slow growth in the rental market, yields are set to boom.

BIS Shrapnel managing director Rob Mellor said interest rates were likely to remain on hold for the next few months while the Reserve Bank of Australia (RBA) monitors the consequences of their rate rises in November 2007 and February and March this year, before a likely rate rise again in September.

"We don't really know the consequence of the last few rate rises, but ultimately the Reserve Bank has to target inflation - that's their mandate," Mellor said.

"At some point in the future when construction levels take off, interest rates will get higher again. By 2012, rates will be around 10.5%. There's very little scope for the easing of interest rates."

Mellor said that long-term property owners who could find a good five-year fixed rate for their mortgage would be wise to lock down their loan. "Rates will hover around 9.5% for the next five years - it could be worse."

Jason Anderson, senior project manager with BIS Shrapnel, went on to paint a gloomy picture for Sydney renters, when he announced that rents are expected to grow by more than 50% in the next four years.

"By 2012, rents in Sydney will be 54% higher than they are now, due to such low rates of construction of new housing," he said.

He added that vacancy rates in Sydney, currently at less than 1%, are likely to remain that way for at least the next two to three years.

Ironically, Anderson said that rising rents are one of the key drivers of inflation - so while investors are reaping the benefits of increasing rental yields, the upsurge in rents is also partly responsible for the increased costs of lending.

"If we hadn't had the rent rises we've had in recent times, inflation would probably only be at about 3%, rather than 3.5%, so I don't think we would have experienced as many RBA rate increases as we have had [if rents had not sharply increased]," he said.