The Australian rental market has become a household talking point in recent months, with Australian rental affordability dropping to a decade-low, and wages receding in real terms it’s no surprise many are feeling the pinch. An average household spends about a third of their income on their rent, with the proportion for lower-income groups reaching a staggering 50%. Over the past decade, household rent has accounted for 6 per cent of the CPI, making it the second-largest contributing class. It then goes without saying an increase or decrease in this sector has large implications for all in society. While rents have been sloping upwards since 2006, the rate of change has been at a steady 5-6%. However, we have seen a big jump in the increase in rent in the last two years, reaching double-digit per annum growth rates of over 10%. The recent increase suggests the biggest cause to be the reopening of the country after the COVID-19 Pandemic. Behind the scenes, interest rate dynamics, increased immigration, and a housing-obsessed nation have all put further upward pressure on rents.
The Impact of Immigration
The pandemic has served as an unprecedented shock for rental properties. Due to low business activities in most of the sectors of the economy and high vacancy rates, there was a fall in prices. But after the reopening, we saw a sudden spike as the public returned to cities for work leading to increased demand for commercial rentals. Most notably, the return of immigrants has led to increased demand for rentals, who are competing with younger Australians. Since the borders reopened, there have been more immigrants looking for housing spaces, and a big number of these account for international students. According to the Australian Bureau of Statistics, there was net inflows of over 300,000 people in the 12 months to September 2022. With no additional supply to compensate for this influx of immigrants, it comes as no surprise that migration accounts for one third of increase in rental prices in capital cities.
Where is the supply?
Another key driver of high growth in rental prices is an increase in construction costs resulting in a lowered supply of new residential properties and apartments. The Housing Market House Building Cost Index rose a massive 17.1% annually in 2022. This rise has largely been caused by an increase in material cost and a significant increase in demand for labourers. Material cost increases aren’t expected to drop back down post-covid, with increasing costs for imported materials and ongoing supply chain issues continually being faced by Australian construction companies into the future.
Given the ongoing nature of inflation of these drivers, we can expect that the end of these rental price increases may not be in the near future. This has been shown with most recent data, with rental vacancies down once again on most recent data for July, dropping 0.04 percentage points (ppt) to 1.43%. So what are the implications of ongoing increases on the Australian economy?
Younger Australians hurt most
The increases are expected to hit lower income earners the most, who are likely to be pushed out of the market being more sensitive to these rate hikes. Similarly, consumers with less predictable income are likely to suffer, being unable to make increased payments on lower earning months. Key groups include 18-25 year olds working casually or part-time and other low income earning industries related to retail and food services. More generally, increases in rent are largely unavoidable by a large portion of Australian consumers who are unable to afford the down payment on also soaring house prices. Absorbing these higher rent prices results in a lowered disposable income and potential effects on industries such as tourism. However the extent of this impact is uncertain, with an increase in income felt by landlords potentially offsetting these effects and a redistribution of income occurring.
The effect of the RBA’s response to inflation on rental prices remains to be seen. With short-term unemployment forecasted, it is expected that more renters will no longer be able to pay monthly dues. The result of this putting short-term downwards pressure on rents. However, it will also put further stress on construction projects facing higher financing costs, tightening the construction industry further, reducing supply of new houses and apartments. This supply reduction will place more upwards pressure on rental market vacancies and prices.
What does the future hold?
As our rental crisis deepens, naturally it calls for innovative and comprehensive interventions from our government. Rental housing policies have an immediate widespread impact on housing affordability and the security of tenure, especially when compared to policies aimed at home construction. There are various policies the government can enact to ensure that Australia’s tenants, both long term and temporary, are as supported in the housing market as the nation’s homeowners.
In terms of interventions on rental increases, the Greens have proposed a two year rent freeze, followed by a permanent cap on rent increases of 2% every two years. Ultimately, although this intervention may seem attractive due the impact increase in affordability of current rental properties for tenants, this will further exacerbate the gap between supply and demand of housing. Landlords may experience lower incentive to rent out their properties, and there is also lower incentive to build more housing. Although this intervention is aimed at addressing the rising cost of rent for tenants, it does not address the root cause of this crisis, which is that there is not enough housing to go around. The work from home revolution coupled with the reopening of Australian borders has far boosted demand for housing beyond supply, and freezing rents would only leave us with fewer, poorer-quality homes. Perhaps a better alternative to this intervention is if the government placed caps on rental increases. The closest system to a rental cap currently in place is in the ACT, where landlords cannot increase rent by more than 10% over CPI without justification. This is a better solution, which still preserves some incentive to supply rental housing, and therefore works to alleviate the gap between supply and demand that currently exists. However, there is a potential issue with this policy, as most debt costs increase by more than rents do especially now. This may mean that more landlords go under, if their rental revenue does not cover their repayments. In this rising rate environment, it is vital for the government to be conscious of the impacts to both landlords and tenants in the short and long term when devising interventions, and implement policies that are well rounded and address these issues.
In our current environment of rising interest rates and high inflation, it is no surprise that our rental crisis is a pertinent issue to those in the housing market, as well as the policymakers of the nation. In a post COVID world dominated by the rise of working from home, as well as a surge of migrants post border reopening, Australia’s housing market is feeling the pinch. Both tenants and landlords alike face different challenges, but the core of the issue is that our governments must take holistic action in order to bridge the gap between supply and demand to ensure all Australians have an opportunity for reasonably affordable housing.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
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I am a second year BCom student majoring in Finance and Economics with a passion for financial markets and writing.
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