What’s causing Australia’s nightmare rental market?

With tight housing supply in Australia, it’s a landlord’s market, and renters are queuing out the door in a fight to get a lease. But what’s driving this rental nightmare? Is it inflation? Housing availability? The Phillip Lowe effect?

This rental nightmare raises even bigger questions for Australia: whether we can fix housing. Because the impacts aren’t just on buildings – there are very real effects on tenants, especially women, seniors, and low-income earners.

Listen to host Kat Clay, in conversation with Trent Wiltshire, Deputy Program Director and Joey Moloney, Senior Associate, about what’s causing Australia’s nightmare rental market, and whether we can fix it.

Transcript

Kat Clay: With tight housing supply in Australia, it’s a landlord’s market and renters are queuing out the door in a fight to get a lease. But what’s driving this rental nightmare? Is it inflation? Housing availability? The Philip Lowe effect? This rental nightmare raises even bigger questions for Australia.

Whether we can make the housing market more equitable for all. Because the impacts aren’t just on buildings. There are very real effects on tenants, especially women, seniors and low income earners. I’m Kat Clay and here to talk about what’s causing Australia’s nightmare rental market and whether we can fix it are Trent Wiltshire, Deputy Program Director, and Joey Maloney, Senior Associate.

Welcome to both of you. So there’s a perfect storm of issues at play here. I mean, it’s hard to find a house and those who do are paying a premium price. How did we get to this point?

Trent Wiltshire: As your interest said, it is a really crisis time for renters. We’re seeing rents skyrocket. There’s pictures of queues out the door to try and get into rental properties.

The vacancy rates so low. So there’s a number of factors at play. That sort of led to this point. But in simple terms, there’s been a big run up in demand for housing over the past couple of years, and we’ve seen supply pretty weak as well. So those two factors have meant rents are starting to rise.

But just to run through a few stats of What the market’s like at the moment. So we’ve got a national vacancy rate of around 1%. And that’s well down from a year ago. And it’s well below what market analysts typically think of as a normal or a balanced market, which is about a 3 percent vacancy rate.

That’s the national rate about 1%, Adelaide, they’re particularly tight. And one analyst just, just published today that they found only eight of 336 areas around Australia had a vacancy rate of over 3%. So it’s very broad based tightness. But tight vacancy rate. Has led to, you know, a rapid run up in rent.

So asking rents on most measures is a few different data sources that national asking rents are growing at over 10 percent a year in most capital cities and in the regions as well. So domain had it as their fastest. Annual growth in rents over the past year in its, in its whole data series and some suburbs are seeing asking rents jump by sort of 30 to 40%.

So it’s bad everywhere across the country. More so in some areas, but it’s, it’s really a nationwide story. And not only that, the outlook is bad as well. So. This is going to continue for quite a while. So Westpac just put out some forecasts. They think asking rate rents are going to grow by another 11 percent over the year ahead.

With interest rates rising construction looking pretty weak. Yeah, it’s looking pretty dire for the next year to a few years out.

Kat Clay: Those rates are so tight. I mean, I remember when I moved to Melbourne and we actually asked for a discount on our tenancy because it was so hard to find tenants at the time.

Fast forward 10 years and the opposite is happening. But I don’t really remember this being such a big issue in 2019. What’s changed here?

Joey Moloney: Where this story really starts or where this wild ride in the rental market over the last few years. Can be traced back to is at the start of the pandemic. So sort of the top of 2022, one of the first, one of the things that happened early on in the pandemic was there was a really rapid shift in what people wanted in their living arrangements.

People were looking around at their housemates in their share houses. They were also looking at a situation where they were probably going to be working from home for a pretty long indefinite period of time, and they thought, I need more space to myself. Now, what that meant is that for every, for a given number of people, you need more houses to go around because if people want to live in smaller households, obviously that means you need more houses for the same number of people.

The RBA had some great data illustrating how rapid this shift was. It showed that average household sizes, so the average number of people in a household fell really quickly and a big driver of that was a lot of share houses dissolving. And a lot of people moving in with their partners, some moving in with their parents and some people just moving into their own place by themselves.

That was fine in the first instance, rents didn’t start going up until recently, rents weren’t going up in 2020. And the reason that it was fine in the first instance, Is it, there was no population growth during COVID because one of the other things we did is we shut the door to migration, which means there’s no new people coming in.

So that just means that there were enough houses to accommodate. These new preferences that people had for their living arrangements. So these preferences from COVID that happened at the start of the pandemic, they look here to stay. People signed up to leases to live in smaller households than they were before.

But the critical change is population growth is back. Isn’t that right, Trent?

Trent Wiltshire: It is right. And I’ll just add on the preference shift, Joe. I think what’s interesting is that when the rental market loosened a bit, we saw, you know, average household size drop for the first time in quite a while. I think it actually showed that people.

Want more space. So more housing is good for people’s preferences. They get to, you know, decide what they want. Maybe there’s potentially second homes as well that people are buying. Share houses breaking up, people living on their own. Realestate. com did some great analysis showing the biggest jump since the 2016 census was in single person households.

So there is a preference for more space. And I think, you know, That people would like that to be ongoing, but as we’re talking about, you know, with rents rising so rapidly, that’s probably not going to be the case. But just jumping back to the, the big rebounding population. So when the borders reopened, we have seen a rapid turnaround in net migration led by a big surge in temporary migrants.

So I guess there was a concern that when we did slam the border shut. During COVID and you know how we treated some of our temporary residents here that be concerned that Australia wouldn’t be that attractive to migrants. But that hasn’t been the case at all. So migration has surged again. So student numbers fell by about half number of students in Australia fell about half.

at the worst part of COVID, but they’re back to just below where they were pre COVID. Working holiday makers so backpackers, they fell, numbers of them fell by 85%. That’s back to about 20 percent below where it was pre COVID. Skilled workers are back too. So in terms of net overseas migration before COVID, we normally had about 250, 000 people coming here on net.

It looks like that will be sort of around 300, 000 people for 22, 23. So yeah, a huge surge in the number of people. back and that’s, you know, one of the key drivers of why the rental market is so tight.

Kat Clay: There’s all these people who have rented places with more space, but now rents are rising. I mean, are people going to be able to manage this?

What can you see happening here?

Joey Moloney: So what you’ve got out there, Kat, is phase three of this rental crisis. It’s been a slow evolution over three years. So what we’re seeing now is a lot of people who’ve got more space to themselves are rolling off leases, coming onto new leases and facing pretty big increases in their rents.

You know, upwards of 10 percent like Trent mentioned before. Now this means a lot of people are looking at their situation and realising, I can’t actually afford this extra space anymore and I need to readjust. back into a larger household like I did before, maybe reassemble a share house or something like that.

The ABC had a great article, which I think was the, it was the first I saw to report on this. A couple that moved in together, say, ended up having to move back into a share house because they can’t afford the lease renewal on a new place. Now, this is Arguably a necessary feature of the process in that what higher rents are is a price signal that encourages people to readjust their living situation and that means that there’s going to be less overall demand for housing because people are going to consolidate into bigger households and that should lift that vacancy rate.

And then hopefully ease pressure on the, on RETs.

Kat Clay: I mean, Trent, how are higher interest rates playing

Trent Wiltshire: into this? Yeah, it’s a really interesting topic actually, Kat. And it’s obviously got a lot of coverage in the media over the past few months as the RBAs rapidly raise rates and we expect further rate rise in the months ahead.

And Phil Lowe spent a bit of time answering this question when he appeared before Parliament last week because, you know, it’s an understandable Concern and connection that people have. So the, the theory being that, you know, interest rates rise. A lot of rental properties are owned by mom and dad, landlords that have a mortgage.

Their mortgage costs go up and they pass it on to renters. So that seems to be a pretty clear process. There’s probably one complication in that somewhat simple analysis. So when the rental market is very tight that’s when landlords have some power, some pricing power. So when the rental market is tight, interest rates do go up.

There probably is some path pass through of these high interest rates to rents when the rental markets. Not as tight when the vacancy rates are say, if they were three to 4 percent and interest rates are rising, then probably rent rate rises would have minimal impact on rent. So it’s really the key thing here that here is that the demand and supply for rental properties rather than the changes in interest rates, and it’s probably another example as well that monetary policy or changes interest rates are really blunt tool.

So the RBA has one lever to try and control inflation that’s interest rates and they had, these have, you know, big impacts on a whole different range of cohorts of people across the Australian economy, rent has been one of them.

Joey Moloney: Hey Trent, take question without notice. Landlords have the ability to, if their interest costs go up and it outweighs the rental income that they receive, they get to write off that net loss against other taxable income.

How much would you expect? That feature of our tax system, which we call negative gearing to help offset the increased costs being passed through to rents.

Trent Wiltshire: Yeah, like it’s clearly a way to offset those rental costs. Of course, negative gearing, it doesn’t make you money. it just reduces your tax bill. The fact that higher interest rates going up means you’ve got a bigger write off of your tax.

Most landlords negatively geared, so that would mean you know, the, the pass through will be softened somewhat, but I still think the general principle holds that if interest rates are rising in a tight rental market, that’s when those rate rises are going to be passed on to renters.

Kat Clay: That’s a great question, Joey, because I was actually thinking the same thing.

I mean, where does negative gearing come in? And I’m sure some of our listeners will be thinking about that as well as landlords and renters. Not a day goes by when we see a story about a single mum struggling to get a rental property. I mean, we’ve talked about students and young people moving back into the family home.

I mean, we’re still at the Those who have been made homeless by the rental market. Who is getting left behind here with surging prices and low stock?

Trent Wiltshire: It’s like clearly the saddest part of this story. And as I said at the outset, you know, it’s been bad for a little while. I’m expected to continue for a couple more years as well.

So the unfortunate part of a rental crisis is it does affect people that are typically lower income, younger people as well. So let’s look at the data. 80 percent of. 15 to 24 year olds rent privately compared to only 14 percent of 55 to 64 year olds. It’s going to disproportionately impact young people, lower income people.

Your link to homelessness there is a really good one. It’s a clear link that higher rents in the private market. Associated with more homelessness as well. And these people have done it tough, toughest as well throughout COVID. So it’s been some interesting data kind of recently showing that, you know, in the inaggregate households have built up quite decent buffers, like quite big savings throughout COVID, but they’re really concentrated in higher income, older households.

So those younger, poorer households that are more likely to be renting. They haven’t got the savings buffers and they’re now facing big rent increases.

Joey Moloney: Yeah, I want to add to that is, you know, one of the longer term trends in Australia is falling rates of home ownership. And those falling rates are typically, are mostly concentrated amongst younger and poorer households, but there’s sort of a spread up and down the income distribution.

And up the age distribution as well. When you look at the share of say, you know, mid thirties couples with a couple of young kids, the share of those that own their home versus renting, there’s been a pretty marked shift over the last few decades that more and more of those households. In the private rental market now.

Middle income young families are probably not the cohort you’re most worried about in terms of heightened risk of homelessness. But what you do worry about is the security of their tenure. The aggregate increases in advertised rents are running at about 10 percent in most capital cities. But, you know, there’s a wide variation underneath that.

There’s stories of You know, some people’s rent going up 25 percent in one go. If you’ve got a young family settled in an area, maybe the kids are in school, they’ve got childcare arrangements that they’re comfortable, they’ve got a good commute to work, lease renewal comes and it’s 25 percent more and they just can’t afford that.

That can be very, very disruptive to a family that puts a lot of value on security of tenure. So I think the changing face of renters in this country is really a key. A key thing to keep in mind when we’re thinking about how the rental market is serving renters.

Trent Wiltshire: It links to, like, the overall housing affordability issue as well.

So, prices have risen so much over the past 20, 30 years that people are getting into the housing market later. So, they’re renting for longer. As you said, there’s families renting. So, these rising rents are going to actually eat into people’s savings buffers that they’re trying to save to build up a deposit with interest rates rising, you know, the serviceability requirements are higher as well.

So it’s really a vicious cycle in some ways that impacts all Australians that need housing. So it’s a really tricky situation. I

Kat Clay: remember that there was a chart that kind of Brendan and your team had done in the pandemic about basically showing how few people had access to an emergency supply of money and Just struck me as we were talking about, you know, the poor suffering, most of this idea of certain people have a buffer of, of money, you know, in their bank accounts, but a lot of people don’t.

I

Trent Wiltshire: I think that that’s completely right.

Probably the, it’s been quite a, a negative or pessimistic podcast. The one, the one positive note I can think of is the labor market is incredibly strong. So the unemployment rate is at 3. 7%. So it’s been around three and a half percent lowest in about 50 years under employment. So people want to work more hours is very low as well.

Job ads and job vacancies are really high. So the one positive there. Most people, or pretty much everyone that wants a job, should be able to get a job. So that is one thing that will help with this affordability crisis. In saying that, we know wages growth is pretty weak, so there’s definitely negatives there as well, but that’s the one positive story.

Kat Clay: Well, it’s good to have some kind of positive story out of this podcast, because I know there’s a lot of people doing it really tough at the moment, and it’s very hard with all the interest rate. Rises regardless of whether you’re a renter or a homeowner, Joey, we’re also about solutions at Grattan. Can the situation for renters be improved or does it just need to be borne out over time?

Joey Moloney: There are definitely things that the government can and should be doing to help ameliorate the sort of harsh edges of this situation. First and foremost, you know, we’re talking before about who are the vulnerable people that were like to fall, likely to fall out of the bottom. in this situation. You know, that low vacancy rate fundamentally represents too few houses for too many people.

So in that scramble, some people are going to lose, you think about it, this game of musical chairs, the person in the weakest position is going to lose out. The first thing I think government should be doing is thinking about an increase in the rent assistance payment. So this is a payment in our welfare system.

It’s, it’s a supplement that’s tied on to other income support payments. So any income support recipient In the private rental market, say an aged pensioner who lives in a private rental, a job seeker recipient who lives in a private rental is eligible to receive it. The problem with it is it’s too low and it’s the way that it’s been indexed over the years, so the way that it’s gone up over the years hasn’t kept pace with rents and it’s certainly not keeping pace with current rents.

Probably what’s needed is about a 40 50 percent increase in the rent assistance payment. Now, this is money that they, recipients of it, they don’t have to spend on rent. They can spend it on whatever they want. The key point of it is, is, is it saying that, okay, we understand your living costs are higher in the private rental market.

So here’s just a bit of extra cash to help get by. And what that should hopefully do is that vulnerable poor people on income support payments facing rent increases that are going to absolutely break their budget. Hopefully just a little bit of extra money in their pocket can make ends meet and could potentially mean the difference between them not being able to you know, keep a secure roof over the head and otherwise. Fundamentally, the game here is about there not being enough houses to go around. So what do you reckon, Trent? Do you reckon we can just build enough houses to build our way out of this problem?

Trent Wiltshire: That is the medium long term solution to build more housing.

But again, they’re the The outlook isn’t great. So the housing industry association came out with some forecasts and data the other day. It forecasts that the number of new homes to be built this year is expected to be 8. 9 percent lower this and then in 2024, a further 12 percent lower. Housing supply is actually forecast to drop.

We’ve actually got a decent pipeline at the moment. That’s sort of a hangover from COVID, where there was a lot of supply chain issues and things took a while to get built. So we are building a lot now, but our building industry is very cyclical and very tied to interest rates and house prices. So when prices fall, when interest rates are rising construction typically comes down.

So actually heading into a weak spot in terms of how much we’re building the private sector, just as we need to build more housing. So that’s where, you know, government can play a role. And that’s where they can step in and build more social housing. So it’s on the agenda, but again, that’s a, it’s a medium long term solution.

It needs to be done, but it’s not going to help. In the immediate term, I mean.

Kat Clay: Joey, the Albanese government have promised the housing Australia future fund. I mean, is that going to be part of this solution? I’m keeping in mind that the houses just don’t appear out of thin air.

Joey Moloney: Yeah, the housing Australia future funds definitely part of the solution.

So this is a. a bill that’s in front of Parliament now to set up a fund and the returns on those funds help build more social housing. The reason this is really, really important is because our social housing stock has been neglected over the past few decades as a share of all the houses in Australia.

You know, social housing’s fallen from six to four percent. So in absolute numbers, it’s stayed the same, even while the population’s grown about 30%. The problem that that creates is that for every person who is vulnerable and will need social housing to keep a roof over their heads, there’s just not a flow of available units for them to move into.

Ultimately, this is about construction and we’re going to run into the same supply pipeline issues that Trent was just illuminating. It’s still not going to be a solution that’s going to help us in the short term, but it’s critically important that we maintain our housing stock so we don’t, the social housing stock, so that it doesn’t go backwards like it has in the past.

And critically, you know, the, the key thing here is that we just want to make sure that we have a healthy flow of social housing to protect vulnerable people who have sort of left out when in the scurry for houses in the private rental market.

Trent Wiltshire: I’ll just add just before I just talked about the housing.

Construction cycle being very cyclical, tied to interest rates and prices but rents will play a role as well. So Joey talked before about rents being a price signal. They’re also a price signal to developers. So if rents are going to rise 20 to 30 percent over the next few years, you know, hopefully developers think, okay, this is a way I can make a profit and jump in and build more housing.

And that will actually ameliorate some of the, the rent increases. So government can play a big role, but the private sector will play a role by being able to build more housing. But something we’ve talked about a lot here at Grattan is changing the, the planning rules and zoning rules that.

Restrict housing being built in a lot of areas where people want to live. So that’s another, another factor, but again, a sort of a medium, longer term factor.

Kat Clay: Joey, what about rent freezes? I mean, it sounds like a good idea in theory, at least for the renters.

Joey Moloney: It does. It sounds very attractive. You know, intuitively, if the problem is that rents are getting too high, why don’t we just make the law of the land to freeze them in place to stop that happening?

Sounds very, very tempting. Economists tend to agree that rent controls. create more problems than they solve. So, in particular, in the short term, it’ll lock people in place. So, if you recall before I was talking about the third phase that we’re seeing right now of this crisis, where people are readjusting their living situations because they can’t afford to live in the smaller households that they assembled during COVID.

This is a necessary feature of the crisis because what it does is it’ll help get that vacancy rate back up because the aggregate effect of those adjustments is less overall demand for rentals. If you freeze people’s rents, then that adjustment won’t take place, the vacancy rate will stay artificially low.

People who have a rental that they like and can stay there, it’s great for them, but for people who have to move, it’s terrible because there’s not a flow of available housing for them to move into. And in the long term, rent controls They have these sort of bad effects on the quality of rental housing stock, that lower rental yields mean landlords have less money to properly maintain the housing stock.

But critically they also disincentivise supply. If the returns on a investment property are artificially suppressed by the law of the land, then there’s going to be less incentive to build properties to rent out. And we were just saying before that the long term game here is ultimately about building enough housing to accommodate a growing population and people’s preferences for how big a household they want to live in.

And if we dampen the incentive to build. then we’re not going to get that good long term outcome that we want.

Kat Clay: Controversial topic. I mean, we’ve seen it happen around the world that certain cities and countries have banned Airbnbs to manage the rental supply. Are short stay rentals an issue here in Australia in terms of allowing people to find places to rent?

Trent Wiltshire: Yeah, I think they are a factor. In, in aggregate, probably the impact of Airbnb and stays and other sort of platforms that allow people to rent out their properties has been a small factor in rents rising. But in some particular areas, I think it’s been, you know, a significant factor. So that’s the holiday hotspots.

That’s Byron Bay. It’s Bondi, it’s Mornington Peninsula in Victoria those kind of areas, you know, a large proportion of housing is devoted to short stay rentals that takes away from the long term housing stock and probably contributes to overall higher rents and lower vacancy rates. It’s important to think about this in a holistic sense.

So Airbnb does deliver. Great value in terms of tourism benefits. It means more people can come to an area, spend their money, so it boosts incomes in a lot of these areas too. But I do think it has a, it’s a factor in pushing up rents. Yeah,

Joey Moloney: I agree. I think it’s a factor but not the main game. You know, I think about, I grew up in a country town in Victoria called Dalesford that’s a very, very popular tourist spot.

And a lot of the properties in Dalesford over the last decade or so have been converted into Airbnbs. And I’ve spoken to enough people I grew up with To know that it’s pretty hard to secure affordable long term private rentals in Dalesford, but like Trent said, you know Dalesford has benefited a lot from being able to facilitate that kind of tourism, you know, it’s made the town Reasonably well off and it’s created a lot of jobs So there’s a bit of a two edged sword there and there’s there’s just trade offs here So if we were to just out and out ban Airbnb I’d expect that to be a net negative for a town like Dalesford, but I can understand why people in the first instance look at it and think that it’s taking too many properties off the long term rental market.

Trent Wiltshire: Yeah. And I think given the severity of the crisis and you know, if it gets worse, it’s an option that’s on the table. At least maybe not like an outright ban, but like restricting the number of nights or something like that. But it’s, it’s difficult to implement. There’s a lot of issues with it. But given how much we’ve talked about how severe the crisis is and potentially is going to be, I think it should be an option.

Joey Moloney: I think the last thing I’ll add is, you know, we haven’t spoken about the housing accord that the federal government. The long term solutions that we’ve been talking about, about making sure that we have a housing market where supply keeps up with demand. The housing accord is the vehicle for that. So really what that needs to do is facilitate a meaningful agreement between all levels of government to create the conditions where we have a housing market that’s just more responsive to demand.

The demand, not just from population growth, but also from preference changes as well. It’s just something that’s been neglected for several decades now and it’s sort of at the heart of Australia’s long term housing affordability crisis. It’s just really hitting the floor right now with these rapid growth in rents that

we’re seeing.

Trent Wiltshire: I think that also goes to the politics of it too. So typically renters have been, you know, disregarded in the policy debate, but as we talked about, they’re a growing cohort. They’re getting older. Older people typically have more political clout as well. We know millennials now they’re the sort of the biggest voting demographic.

A lot of them renters or have recently rented or know someone that rents. There’s going to be more, you know, clout from renters to, you know, push governments to deliver policy change to make things better for renters. We’ve seen a bit of that already in terms of state governments reforming some tenancy laws to shift things more in the favor of tenants.

And we may see it in some policies implemented to guys. to address this rental crisis.

Kat Clay: Thank you so much Trent and Joey for your insights on the rental crisis. It’s particularly affecting Australians right now. So if you do want to talk to us about this issue, do find us on Twitter at Grattan Inst and all other social media channels at Grattan Institute.

As always, please do take care and thanks so much for listening.