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‘Blown away by demand’: Why rents are only going higher



When Diana Eloise Binay and her partner got just two weeks to vacate their Sydney rental property a couple of months ago, they knew they would have to compete hard to get another rental property.


“We didn’t have much time to find another rental home, so we decided to offer 10 per cent to 20 per cent above the asking rent in each of the properties we applied for, but we were outspent by the competition most of the time,” Diana says.


“We ended up getting approved for a unit in Belmore, about 11 kilometres south-west of the CBD, but it was tough to find something that’s liveable and reasonably priced. We have to stretch our budget to afford this one.”


Rents are exploding across the country, and the latest influx of Chinese students is set to make the situation worse for tenants such as Binay.


“We are already in a rental crisis which few people dispute how bad it already is,” says Louis Christopher, SQM Research managing director.


“Market asking rents have risen by 37 per cent on average since the start of 2020, so as a proportion of wages, market rents are at record highs. With the now expected influx of international students, market rents are likely to keep rising at an accelerated rate.”


Without new properties coming to market, the situation is likely to get worse, says Steve Mann, CEO, UDIA NSW.


“Rising rents are purely representative of demand outstripping supply. We simply do not have enough rental properties to satisfy people’s needs,” Mann says.


In the past 12 months, rents surged at a record-breaking pace of 14.6 per cent for houses and by 17.6 per cent for units as vacancies plummeted to their lowest levels ever, Domain data shows.


“Low supply is driving a landlords’ market across all capital cities, worsening an ongoing rental crisis in many parts of the country,” said Nicola Powell, Domain’s chief of research and economics. “The continued growth in asking rents, along with increasing demand, exacerbates a highly competitive environment for tenants.”


Sydney-based landlord Free Morrison said he was surprised to get $50 more a week on his newly purchased apartment in Kensington, 4 kilometres south-east of the CBD.


“I was blown away by the strong demand from renters. We had about 40 people applying on the first day alone,” the 27-year old investor says.


This comes as vacancy rates nationwide slumped to a record low 0.8 per cent in January, with Sydney and Melbourne falling to 1 per cent after a seasonal rise to 1.4 per cent in December. Brisbane, Perth and Adelaide all fell below 1 per cent, while Canberra and Darwin dropped to 1.5 per cent and 1.3 per cent respectively.


“These ultra-low vacancy rates are simply not healthy, and it’s a nationwide issue, not just Sydney or Melbourne,” says Dr Michael Fotheringham, managing director of Australian Housing and Urban Research Institute (AHURI).


“A healthy rental market should have around 3 per cent vacancy rate to allow for a churn of people moving in and out of the rental market.


“When it drops to 1 per cent or below, there’s just not enough stock available for people, and we’ve been sitting around the 1 per cent mark for about nine months now, something which we haven’t seen before.”


ANZ senior economist Felicity Emmett says a dominant force fuelling the rental crisis is the increased demand that started during the pandemic.


“What we saw in the pandemic was a significant lift in demand for housing created by the shift to working from home which gave people laser focus on living arrangements,” Emmett says. “People shifted to smaller households, which has also offset the lack of overseas migration.”


The extraordinary rise in house prices during the pandemic has also priced out many aspiring homeowners and forced them to rent for longer.


“First home buyer activity has halved since moving through near record highs in January 2021, implying more Australians are staying in the rental market,” says Tim Lawless, CoreLogic research director.


“Additionally with the migration program for 2022/23 rising from 160,000 to 195,000, that’s an additional 35,000 people that will need shelter, with a large portion likely ending up in the rental market. This has probably driven rental demand higher than normal.”


Decline in supply


But supply has been progressively declining for some time, and there are no signs new rental homes are being added to the market according to Lawless.


“Private sector investment, which is the main contributor to rental supply in Australia, has generally been trending lower since 2015, apart from a temporary surge in investment during the recent phase of strong capital growth in housing values,” Lawless says.


“Investors have seen additional disincentives which have probably contributed to the supply shortage of rental accommodation, including a substantial reduction in their ability to depreciate assets since July 2017.


“There have been a raft of state-based regulations focused on providing fairer outcomes for tenants which may also be causing investors to think twice about property as an asset class.”


Landlords have also been slugged with up to 0.62 percentage points higher mortgage rates than their owner-occupier counterparts since 2015 when APRA tightened investor lending.


Focus on homeownership


Nicholas Proud, chief executive of PowerHousing Australia says Australia simply hasn’t built enough homes over a sustained period, and policy has been geared towards homeownership.


“There simply are not enough structured affordable rentals in the market,” he says. “The past 40 years has seen a substantial lack of investment in social housing. In 1981, around 4.9 per cent of Australian households were in some form of social housing. That number is now 3.8 per cent. Just to get back to those levels we would have to create an additional 100,000 new social housing dwellings.”


Based on the 2021 Census, only 12.2 per cent of rentals were owned by a state/territory housing authority or community housing provider, down from 13.7 per cent in the 2016 Census.


“In the broader housing market, a stable supply of affordable housing of around 20,000-30,000 homes per annum would start to ease the challenge for the growing numbers that need that price point,” Proud says.


“A stable 200,000 homes delivered per annum with at least one third being rentals over time produces an equilibrium supply and a more stable pricing growth than what we have seen in the past three years.”


The Albanese government has announced a national housing accord with states and territories that aims to free up land and build 1 million homes in five years, backed by capital from the $3.4 trillion super sector.


The government has also come out with the draft of their Housing Australia Future Fund (HAFF) legislation which promises to build 30,000 homes in the next five years.

But efforts like these will take time, and the current dire rental situation calls for immediate action, says Lawless.


“While the federal budget has outlined a boost for social and community housing funding, along with incentives for institutional investment in the build-to-rent sector, this additional funding doesn’t go live until 2024, and is likely to be a slow burn after that due to factors such as planning and build time,” Lawless says.


“There isn’t much immediacy in the rental supply response, so a focus on fast-tracking rental supply would be well received.”


More private investors needed


While not the only solution, private investors are one of many important variables required to solve the rental problem says Kent Lardner, director of Suburbtrends.

“Driving private investors out of the market will see fewer rentals added or replenished, he says. “We need more supply of new stock and plenty of private investors buying them as rentals.”


Margaret Lomas, veteran property investor and founder of Destiny Financial Solutions says reducing stress on investors by providing incentives would encourage them to return to the market.


“We need to make it easier to become a landlord and provide better protection to landlords who are now becoming afraid of getting a tenant they can never evict,” she says.


SQM’s Christopher agrees and noted that property investors do represent part of the current solution.


“Property developers need presales before they commit to undertaking a new housing development. Those pre-sales generally come from owner occupiers and the property investor community,” he says.


UDIA NSW’s Mann says the government also needs to deploy policies to get pre-sales moving, such as removing stamp duty and the foreign investor surcharge.


“Building new homes takes time. We need to ensure developments that have commenced and under construction are completed, especially during these immensely challenging times with escalating interest rates, supply chain disruptions, high material cost increases, resource shortages and the real threat of more builder insolvencies,” Mann says.


Vulnerable renters will also need immediate assistance, but the $6 billion a year Commonwealth Rental Assistance has to be retargeted, Dr Fotheringham of AHURI says.

“We did some modeling of this a couple of years ago, and we found that all the government has to do is tie the payments to not just the income of the household but also the level of rent they’re paying so that those lower-income households that are paying more than 30 percent of their income in housing, or in rental stress, those are the ones that receive it. Those who are paying lower rent don’t need to receive it.

“This will save some and get a more efficient response. It is a pretty simple thing to do, and we’d be keen to see implemented.”


While experts agree that there isn’t one silver bullet to address the current rental crisis, they also agree that prolonging the pain is not a viable approach

.

The government has the tools and resources to ensure a greater housing supply, they just need the political will to do it.


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