A common belief is that landlords are just passing on the cost of their own rising interest rates. However, the situation isn't quite that simple.

Reserve Bank of Australia assistant governor Dr Sarah Hunter shed some light on the issue during a recent speech at the Real Estate Institute of Australia.

She made it clear that the shortage of housing is the main culprit behind our current rental woes.

Dr Hunter pointed out that demand for houses has shot up, driven by more people moving to Australia and changes in how we live.

For one thing,  Australia's population is growing faster than in other advanced economies, mainly due to immigration.

For another, our households are getting smaller, with the average size shrinking from 2.8 people in the mid-1980s to about 2.5 today. This might seem like a minor change, but it actually means we need a lot more homes.

“If for some reason average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference,” Dr Hunter said.

But while more people need more places to live, we're struggling on the supply side.

The early days of the pandemic threw a wrench in the works, causing delays and shortages in building materials and skilled workers. Even though some issues have now been sorted, high construction costs are still stopping new projects from starting – with prices up nearly 40% since late 2019.

Dr Hunter also pointed out that there’s little evidence that higher interest rates have pushed up rents directly, at least not in the short term.

Instead, the amount of available rental homes, which is currently incredibly low, is a bigger factor in how rents are set – as the graph below clearly illustrates.