Rents keep going up and up, and it doesn’t seem like a reprieve is coming any time soon. The Reserve Bank has indicated that rent inflation is likely to remain high over the year ahead, before easing gradually. But with a federal election looming on the horizon, the government will be looking for answers, and fast.
Listen to housing experts, Joey Moloney and Esther Suckling, discuss why 2024 might just be the year of the renter. Hosted by Kat Clay.
Correction: During the podcast, Esther Suckling comments that Victoria, the ACT, South Australia, and Queensland have banned no grounds evictions after the first fixed contract lease. To clarify, South Australia and the ACT have banned no grounds evictions comprehensively, Victoria has banned them after the first fixed-term lease, and Queensland allows them after every fixed-term lease.
Transcript
Kat Clay: As any renter will tell you, renting kind of sucks. Rents keep going up and up and it doesn’t seem like a reprieve is coming any time soon. The Reserve Bank has indicated that rent inflation is likely to remain high over the year ahead, before easing gradually. But with a federal election looming on the horizon, the government will be looking for answers, and fast.
So what can be done? I’m Kat Clay. And in this podcast, we’re going to look at what has been done on housing and what more can be done to make renting better. With me are housing experts, Joey Moloney and Esther Suckling to talk about why 2024 might just be the year of the renter. Esther, can we start by putting some numbers to what’s happening in the rental market right now?
Esther Suckling: There are two numbers that we look at, Kat, to see what’s happening in the rental market. The first is asking rents, which we get from realestate. com, and asking rents reflect the prices of rentals which are on the market.
So asking rents across the country are up 11 percent compared to this time last year. That varies depending on what you are. So the biggest increase in capital cities was seen in Perth that had a 17 percent increase. and the ACT and Hobart, for example, the rents have decreased over that year.
The other number that we can look at is rental portion of the CPI, and that reflects what’s happening to all renters. So how much has the cost of renting increased across the board? The CPI rental component is up 7 percent a year on. And when we think about why those two numbers are different, it’s because the asking rents is often kind of the canary in the coal mine, the indicator of what’s to come for the rest of the market.
If you’re talking to friends who are looking out on the market for a rental, they’re describing very high prices. You can probably expect that when your lease rolls over, you’re going to get a rent increase as well. And that’s why we see a little bit of a delayed effect with the CPI catching up to the asking rents.
So when we think about what’s changed in the last year, why have we seen this 11 percent increase in asking rents? There’s two big factors which come to mind. The first is that during COVID, we experienced what we call, a race for space, which is where people basically just needed some more room.
A lot of that would have had to do with, lockdowns wanting a home office, needing fewer housemates around you, that’s estimated to have led to an extra 120, 000 households being formed. And by household, we mean a unit of people, not an actual house for people to live in.
we haven’t actually seen that significantly drop off since the people seem to be happy with having more space. so that’s added a lot of extra demand. The other thing is that migration is back as our borders have reopened. we’re expecting around a million additional migrants over the next four years.
And while migration adds really significant benefits to our economy it does tighten the rental market and also increase demand. So those are sort of the two factors that we’re really seeing driving that increase.
Kat Clay: One of the striking things when I was researching for this podcast, I was reading one of your previous articles and it said that the archetypal renter is no longer a student with a few milk crates and a futon.
Now I do remember being an archetypal student with literally a few milk crates and a futon, but I’m interested Esther in what does a typical renter look like these days?
Esther Suckling: So that’s a really big and important change that we’re seeing. That historical idea around the renter being someone in their twenties who’s come out of living at home or university in their first job, has really shifted and people are renting for a lot longer. So between 2001 and 2020, the share of 35 to 44 year olds who were renting, increased from 23 to 37%. And that’s an increase of 700, 000 households. another interesting statistic is that around 40 percent of middle income households age 35 to 44 are renting. This means more people raising kids in rentals. in 2019 to 20, a quarter of people that had started their family five years ago were still renting. so what this means is that the renter base is changing from a political perspective. Politicians can’t afford to ignore the 30 percent of Australians living in rentals and that power grows as more of those people become wealthier and also older.
Kat Clay: Yeah. It’s one of those markers of this ideal of the great Australian dream of having a family and owning your home is really feeling out of reach for a lot of people at the moment. It’s clear that renters are growing and changing and those demographics are very different to kind of what I expected.
The rental market isn’t serving them very well. I want to go through some of the solutions because you and the team have done a lot of work here proposing, you know, what can be a whole gamut. of, solutions here. So we’ll, we’ll kind of go through them one by one. The first one I wanted to talk about is that the government lifted Commonwealth rent assistance last year.
Has that made much of a difference given that rents keep going up?
Joey Moloney: I’ll say first it’s great to be back on the pod, although by my count this is Mark 3, talking about renters and the rental market on the pod, which is probably a bit of an ominous sign of the, the prolonged nature of this issue that we are still dealing with. So, to your question, I might start by just recapping what Commonwealth Rental Assistance is.
So, it’s a supplementary payment in our income support payment system. if someone’s on, say, JobSeeker, the age pension, disability support pension and they rent in the private rental market, they get an extra supplementary payment. It’s there to acknowledge the fact that renting in the private rental market is pretty expensive and your base payment is probably not going to get the job done.
So like you said, it was lifted last year. The government lifted it by 15%. That was its first discretionary increase in a long, long time. For a typical recipient, it’s probably about an extra 15 bucks a week. It varies because there are different rates and thresholds for different types of people.
So, it’s something. It’s good that it was increased. But, it’s probably not enough. We’d always said that we think it needs to be raised by at least 40%. And we arrived at that number because that’s the number that would have roughly restored the real value of the payment. Now what I’m getting at there is the payment is indexed, which is to say it’s kind of natural business as usual rate of increase is CPI, the inflation, overall inflation rate.
Now the problem is the rents that low income people have been paying have been going up quicker than inflation. So if we turned that 15 percent increase into a 40 percent increase, that would probably cost the government about an extra 1. 2 billion. So it’s not a small change, but pound for pound, it’s money very well spent because it’s going directly to low income people in the private rental market. Looking forward, the other change that’s needed is to change the indexation. So if we change the indexation to say the rents that low income people actually pay rather than inflation, then we won’t look in the rear view mirror in a decade’s time and be facing this same problem again of its real value being eroded.
this has got to be priority number one for 2024 for the government. If you want to help renters and you want to put cash in the pockets of some of the most vulnerable renters in the private rental market, A further increase to Commonwealth Rental Assistance has to be at the top of the list.
Kat Clay: So increasing Commonwealth rent assistance is all well and good and, you know, increasing that indexation measure as well, but won’t landlords just hear this and say, great, I’m bumping up my rent by whatever the rent assistance goes up by.
Joey Moloney: Yeah. No, it’s a great question, Kat, and it’s a common concern and I think, you know, people’s ears are pricked up. They hear the payments called rent assistance and they think, oh, well that’ll just flow through to rents and landlords will lift rents more than they otherwise would. A key thing to keep in mind here is that the payment’s untied.
You don’t have to spend it on rent. It’s just some extra cash to acknowledge the fact that renting in the private rental market is expensive. not all private renters, receive it and those who do receive it can spend it on whatever they want. So economic theory would dictate that an untied payment like that, which just has a loose eligibility of some private renters, shouldn’t capitalise into the amount that’s being actually charged for that particular service.
It’s a hard question to analyze empirically. It’s hard to get a, you know, counterfactual control group, but the empirical work suggests that it doesn’t really through to rents and that the benefit is essentially just more cash in the pockets of poor people who need it.
Kat Clay: And the logic is too that not everyone receives rent assistance. So, I mean, you can’t just go bumping up rents expecting that everyone receives it. It doesn’t make any sense.
So we will get into a little bit of those protection mechanisms for renters as well later in the podcast.
I think you all have some good solutions looking at the states and what they’re doing at the moment. We have touched on the Housing Australia Future Fund quite a bit on the podcast, we’ve done a lot of work on that, and it passed Senate last year. with aim of delivering 30, 000 social and affordable homes in the next five years.
I know that we won’t spend too long on this in particular, but is there more that can be done in this area?
Joey Moloney: You’re right that we’ve touched on this before, so I don’t want to labour the point too much, but just a super quick recap of, of, what the HAFF is and what it’s trying to do. So, we’re talking about social and affordable housing here. Obviously this is a podcast about the private rental market, but I’ll come to the connection between the two in a moment.
Now the defining feature of social and affordable housing is a subsidy, which means that the rent is lower than the market would otherwise charge. So people living in that house get discounted rent. What the HAFF does is it takes a big pile of money, invest it, and then the returns to those investments are used to fund those subsidies.
So that’s how it enables the creation of more social housing. Now it’s important because our social housing stock has stagnated. It’s barely moved in a couple of decades, even while the population’s shot up by about a third. So that means as a share of the overall housing stock, it’s fallen from about 6 per cent to now below four per cent.
And the big problem there is, there’s no flow of available houses for people to move into when their lives take a turn for the worse. What we think the government should do in 2024 here is quite simple, which is double the fund. So, you know, Grattan’s original work on this had a fund double the size of what the government’s proposed.
So a 20 billion fund. Naturally that would double the amount of social and affordable housing that you can build with it. Now this won’t help too many private renters in 2024. One, because there’s a finite amount of social housing that, to go around and two, because it takes some time to build homes.
But this is a really critical piece of the long term puzzle, so it can’t be overlooked. The more social and affordable housing we build, the more protection there is for the more vulnerable people in the private rental market. So this is how the two are interrelated. When you’ve got a really tight private rental market like we have right now, someone is going to lose in that game of musical chairs. And if there is a healthy flow of social housing, then that is the safety net that can catch them. Now, there’s a second point to be made, which is that the more homes that the, that the government funds, potentially the more homes we have overall, although there’s a potential that some of this will crowd out private construction, but if we get more homes overall, regardless of whether it’s social and affordable or otherwise, we’ll get a higher vacancy rate.
Because there’ll be more homes to go around and that it really is the ultimate solution to this rental crisis. If there are more homes being built then there’ll be more to go around rents will be lower and everyone will have a better shot at finding some affordable suitable accommodation. So I just want to run this out by linking back to the Housing Accord, which is the instrument that the government is using to pursue broader housing supply reform.
So they put, in August last year, the federal government put three and a half billion dollars on the table to incentivize the states to reform their land use planning regimes to get more housing built in the suburbs where people want to live and work. And we can identify the suburbs where people want to live and work because that’s where rents and prices are the highest. So there’s not heaps more the federal government can do here.
The pen is held by the state governments when it comes to this, but there is certainly a job to be done to monitor the progress towards that housing accord target of 1. 2 million homes over the next five years, because more homes being built really is the ultimate long term solution to housing affordability woes.
Kat Clay: Joey, one of the things we do get asked about quite a bit, and I think it’s quite a controversial proposal, is that the Greens have been pushing for a two year rent freeze, followed by a two percent annual rent increase cap. What I’d really like to know from you is, would this do more harm than good?
Joey Moloney: I might just zoom out to start and quickly we’re talking about rent regulation, we’re talking about regulating the when and how of rent increases. Now, no one disputes that you need some sort of regulation in the space, because there are serious power imbalances between landlords and tenants.
So you need some sort of regulation to ameliorate that power imbalance. The fundamental trade off you’re trying to navigate is the desire to protect the tenant versus the negative side effects of distorting the rental market. Now, the market price matters. the stronger the regulation is, and the more that you distort the price from the market price, the more negative side effects you’re going to get.
So just to give you an example, you know, one side effect is what economists call a misallocation of housing. There’s a paper out in New York which showed that, rent controlled apartments were used very inefficiently, for example, you had a single person who managed to score a rent controlled, say, three bedroom place, and they’re staying put because it’s rent controlled, and they don’t actually have to pay what three bedroom normally costs.
Now, that’s great for them, but if you, if on the other side of the equation, you’ve got a family of four squeezing into a one or two bedroom apartment. You can see the housing has been misallocated because the market price has been distorted. Now in the long run, if we artificially suppress the yield or the return to investment, then we are going to see less investment.
And what that means in the rental market probably is poorer quality housing stock and potentially lower rental stock overall. So onto the Greens proposal of a rent freeze followed by a rent cap. This is a pretty old fashioned approach to rent control.
This one is a bit of a throwback to an old era. It’s pretty, pretty blunt. It’s not particularly flexible. It would create a lot of winners and losers. So there’d be people who are really happy with what they’ve got and the rents would freeze and that’d be stoked. But there’ll be people looking for a place to live.
And if no one’s moving in that vacancy rate stays really low, they’re going to struggle to find somewhere to live. So ultimately the risk here is more homelessness. In the long term, if we cap rents, like I said, we’re potentially going to have a detrimental effect on the incentive to invest, which means poorer quality stock and potentially lower stock overall.
Kat Clay: So you’ve explained why that’s going to do more harm than good, but is there anything else that could be done to give renters some protection against large sudden rent increases?
Joey Moloney: Basically all jurisdictions, all state and territories in Australia regulate the frequency of rent increases, so maybe one or two times a year.
There’s also some provisions to allow tenants to challenge a rent increase as, you know, excessive. They can escalate it to an independent tribunal, argue their case, this rent increase is too much, it’s going to push me out of my home, this is unfair. Independent tribunal then sort of negotiates an outcome from there.
But this system probably leaves a lot to be desired. It’s pretty hard for tenants to feel confident in assessing whether an increase looks excessive or not. It’s hard for the tribunal to sort of make assessments with limited data and information. So it’s all a bit cumbersome and a bit arbitrary and a bit messy.
The jurisdiction that is doing something a little bit different is the ACT. They’ve got what I call a market linked escalation benchmark. A lot of people will describe the ACT policy as a rent cap. I don’t think it’s that, and I’ll tell you why in a moment. The way it works is that if a landlord wants to increase the rent by more than 1. 1 times the overall rate of rent increases in the ACT, then they have to put that to the tenant and if the tenant says, I disagree, then it automatically goes to a tribunal where the landlord must justify why they have exceeded the benchmark. So what it is, it’s a benchmark that says here is probably the amount by which we should be asking questions about whether this is reasonable or not.
So it could be tried elsewhere for sure. But the key thing here is the benchmark where the data comes from to actually produce that benchmark.
Joey Moloney: So what they use in the ACT is the rents as measured in the Consumer Price Index. it’s that stock of all rents, what’s the movement in the stock of all rents being paid in that jurisdiction. Now this works kind of fine for Canberra, right? Because the Canberra and the ACT, it’s a pretty contained single rental market.
So the overall rate of rental inflation is measured by the ABS in the Consumer Price Index. Kind of works. It’s going to be a bit more challenging in other jurisdictions. for example, the ABS measures the CPI for Brisbane, which means that they measure rents for Brisbane. Now if you’ve got a tenant and a landlord arguing about a rent increase in Townsville, the index in Brisbane is probably not going to be particularly helpful because they’re a thousand, over a thousand kilometers apart.
So if other jurisdictions wanted to implement this model. The key thing that would really need to happen is an investment into the ABS to be able to produce much more granular rental data. Now, as a analyst who, you know, likes to observe what’s happening in the rental market, I could see a myriad of other uses for that data too.
Kat Clay: Is this just a secret plan from Grattan to get more ABS data on the rental market?
Joey Moloney: This would be icing on the cake. Not a secret plan.
The other point to consider is that right now, the ACT model is if you’re 1. 1 times overall rent inflation. Now that looks a little low. We worry if we sort of extended this model to other jurisdictions that could lead to tribunals being flooded, particularly in times where the rental market is tightening up a bit.
We think potentially maybe 1. 5 times might be a better measure for excessive rent increases.
Kat Clay: And I think that’s quite a nice segue because it’s got me thinking about how there’s a bit of an education piece needed to be done too. I mean, when you’re renting, you you, don’t necessarily a lawyer, you’re not necessarily up to date on all the tenants, tenancy laws and all your rights, but Esther we, we were talking about how renters are changing.
I mean, they’re not just uni students anymore. Does this change what they need from tenancy law as well?
Esther Suckling: As people are renting for longer, they are more likely to need secure rental. So particularly for people with kids, having a lack of security or a lack of certainty around how long you’ll be able to stay in a place can be really disruptive. So as the market changes, desire for security is changing as well. But for all renters, there are other elements of the rental market, which includes places which give the renter some autonomy over, you know, whether they have a pet in the house, for example, and then also, rentals with minimum standards.
in other parts of the world where there are big renter populations, like in Australia, the laws tend to be much more in favor of the tenants.
So some examples of places which have stronger protections for tenants and better tenure security, Canada, Spain, the Netherlands, Sweden as well. And even within Australia, there’s huge variation between what the standards are for a renter. we can broadly break it into three tiers in terms of who has the best protections, where’s the best place to rent.
So on the top tier, we’ve got Victoria, the ACT, South Australia, and Queensland. this is based off laws that have been passed, which might not yet have come into effect. So what’s common between all four of those jurisdictions is that they have banned no grounds evictions after the first fixed contract lease. So that means that a landlord can’t ask someone to move on without having legitimate reason.
They also give renters a degree of autonomy. They need to have a good reason for rejecting pets or small alterations like putting a nail in the wall. and they also have minimum standards, which is really important for rentals. That could be something like no mould in the house or in Victoria where it gets very cold in the winter, having a fixed heating unit in the central living room.
So that’s the first tier. In the second tier, we’ve got New South Wales and Tasmania. New South Wales still allows no grounds evictions, and also, landlords are allowed to prohibit pets. In the lowest tier, we have the NT and WA, who are quite far behind. They also allow, no grounds evictions, and, there are no minimum standards for rentals there.
So rentals just need to be habitable, which can be a very, very low bar.
Kat Clay: I mean, having been in a few interesting rentals, habitable conditions sounds very broad and loose in terms of a definition of, of what you can, I can live in a tent, but would I call it habitable, you know?
Esther Suckling: Exactly. And that’s the kind of gray zone, which bad faith landlords, which is not all landlords, but there are some of them, can exploit that grey zone. We are seeing movement, though. South Australia and Western Australia, have been upgrading some of their tenancy laws.
The federal government has actually committed to creating a framework to ban no grounds evictions across the whole country. But I’ll read the wording out to you just so you can assess how strong you think it is. So national cabinet has committed to creating a nationally consistent policy to implement a requirement for genuine reasonable grounds for eviction, having consideration to the current actions of some jurisdictions.
Kat Clay: I was going to say, that just sounds so vague to me. I mean, I mean, what, what does that even mean?
Esther Suckling: There’s no explanation needed. We think that this is the absolute bare minimum that people shouldn’t be forced out for something in the case where they have not done anything wrong. And this kind of thing plays into that idea that I’m sure we have all experienced having rented. Where you might not want to ask for a repair or an upgrade because you’re worried that at the end of the lease, the landlord might think, they were too demanding of me. I’ll just get someone in, but there’s no consequence for that. So that should be a minimum and that should have a deadline on it. we think that needs to be a little bit more sharp, that statement.
Joey Moloney: Think that’s 100 percent right. the leading States are the ones that have made moves on no grounds evictions, you’ve still got, say here in Victoria the right for a no grounds evictions at the end of the first fixed term. That’s a huge hole. That’s a huge vulnerability. I’m actually on my first fixed term right now, which is going to expire in a couple of months. I may well get a letter saying, you got to go with no explanation. the changing face of the renter that you were outlining before, it seems just strikingly obvious to me that at least having a reason why your home is no longer your home is the baseline of what that cohort deserves.
Esther Suckling: And that’s the baseline that we see in those countries that have very mature rental markets where people can comfortably rent for their whole lives. Like Joey was saying before, this really does hinge on more rental properties becoming available because even if you have very strict tenancy laws, if The vacancy rate is still around 1 percent where it’s sitting now.
The power of the tenant is still so much diminished compared to the power of landlord. So there needs to be an option for a tenant to decide to move into a better property in an area that they want to live in with a reasonable rent. So that kind of underlies this whole process of trying to boost tenants rights in Australia.
Kat Clay: Joey, I mean, one final question for you about everybody’s favourite topic, reducing the capital gains discount and negative gearing, this has been on the table for a long time, and obviously I can see that this would put more money into the government’s coffers, but how would that have an effect on renters?
Joey Moloney: This has been on the table for a while and it’s something that Grattan, I think, had a part to play in putting on the table. This dates back to work that we did maybe back to 2015, so you’re coming up on a, on a decade now. We always thought that the main justification for reforming capital gains, tax, discount and negative gearing is the budgetary impact.
We’ve got a budget challenge in this country. We’ve got a lot of nice things we want to pay for. We want a well funded NDIS. We want a well funded aged care system. these things cost a lot of money and right now our budget just isn’t set up to produce that kind of money. So we have to be looking at revenue measures.
Leakages from the tax system, like capital gains tax discounts and negative gearing, seem to be an obvious place to look because you can raise a decent amount of revenue and do it by increasing the fairness of the tax system. So we estimated that reforming both of those things together would raise about seven billion dollars a year.
Now, a lot of people say that the main reason we should pursue these reforms is purely because of the impact on housing affordability, but you’ve got to keep in mind, so we think reforming these would raise about 7 billion. That’s in the context of a 10 trillion dollar housing market. This probably hints that we think that the price impact of these reforms might be a little overstated.
Our analysis suggests that both of them together probably push up house prices only 2 percent more than they otherwise would be. But, that’s not to say it’s not worth doing. It’s worth doing because we need the money for the budget. In terms of rents, the impact would probably be pretty negligible. You know, some people think that it doesn’t really have any impact on rent.
Some people think that negative gearing means lower rents than otherwise. There’s a mix of views and evidence out there. You know, a key thing here is that what negative gearing does is it creates more rentals. Yes, because it incentivizes investment in property. It also creates more renters because it means investors outbidding first time buyers at auction.
So it’s tricky thing to pin down the net impact here. if the argument is negative gearing is good because it, the benefits of it flow through to renters in the form of lower rents, then we’re willing to say that the government should give up some revenue to help renters.
Now, if that’s what we’re saying, have I got a policy for you? I’m going to look back to what we were talking about at the start, Commonwealth rental assistance. I would argue that dollar for dollar Commonwealth Rental Assistance is a much fairer, more direct and transparent way to help renters than subsidizing the rental losses of investors, which is what negative gearing is.
That brings me back to kind of a key takeaway from today’s podcast, which is that in 2024, the year of the renter, we think that a further increase in Commonwealth rental assistance has to be the short term priority for the government, but the long term priority for the government, has to be supply.
We’ve set up the housing accord. We’ve put the money on the table. It’s now up to the States to make sure they get land use planning reform done to get more houses built in the areas where people want to live and work. Because if we have a better, more flexible housing market where supply can better respond to demand, then we’re going to reduce the likelihood that we’re going to end up in a situation like this again, down the road.
Kat Clay: Thank you so much, Joey and Esther. I really appreciate you coming on and talking about all the housing policies that could be implemented to improve the lives of renters and hopefully improve Australia overall. If you want to read more of our research on housing, please do visit our website, grattan.edu.Au. There’s a plethora of information there, as well as our reports, all there for free. If you’d like to donate, please visit grattan.edu.au/donate We rely on donations from listeners like you. Please support our work as we progress into 2024. As always, please do take care and thanks so much for listening.