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Rents to rise as housing boom dies

Rents are expected to rise 6 per cent a year for the next five years, but high interest rates have killed the house price boom after a five-year run, Westpac says.

Rents would need to rise 34 per cent to bring them in line with house prices in terms of landlords' returns, and that process could take five years, Westpac says.

With an end to spectacular capital gains, landlords will no longer be happy to get a paltry 4 per cent yield on a property when mortgage interest rates are above 9 per cent.

"The numbers just do not stack up for landlords," Westpac says in its latest report on housing.

Annual house price rises will hit zero by the middle of next year, which will be a shock after double-digit growth for the past five years.

Rents have been subdued for years, rising at just 2.2 per cent a year in the past four years, but Westpac expected them to rise to 6 per cent a year and stay high.

Good news is that wages are expected to rise about 5 per cent a year.

 Average rents equal about 24 per cent of the average wage, from 28 per cent a decade ago.

In the next few years fewer landlords would want to build new properties and expand the stock of rental properties.

Demand would rise, with rents equal to 4 per cent of a home value compared with 9 per cent to borrow and buy a home.

Rents would also be driven up by high interest rates and strong wage growth, creating a new inflation problem for the Reserve Bank, Westpac says.

The central bank is expected to keep the official cash rate at 8.25 per cent in this week's Monetary Policy Statement, but Westpac believes it will raise interest rates twice next year - and it is likely to foreshadow that on Thursday.

Stagnating house prices would normally be a sign of an economic slowdown, cooling inflation and lower interest rates.

But the slowdown has come at the same time as the strongest world economy for three decades.

The impact would be swamped by the inflationary effects of the dairy price boom, greater government spending and the potential for tax cuts, a strong job market and the strong Australian economy.

Meanwhile, it will be difficult or impossible for home owners to borrow more as house prices cool.

The wealth effect means that as the value of homes rises, people feel richer and so spend more.

That could either be by borrowing more or buying smaller homes and having more cash to spend.

Westpac estimated that $9 billion of this "equity" had been taken out of the housing market in the past two years. In the next two years that would be down to about $5 billion - which is equal to about 2 per cent of all private spending.

The reduction would hit some retailers hard, especially those selling big-ticket goods.

The drop would be small, however, compared with the dairy industry's expected $7.2 billion windfall from high global prices.

The Government would also get more tax from that dairy income.