Decades of house price growth have caused a “brutal” trickle-down effect in the Australian rental market, leading to an unprecedented crunch.
But who's to blame for the increasingly desperate situation many would-be tenants find themselves in?
As even high-income earners struggle to attain the Great Australian Dream of homeownership, they are being forced to rent for longer, pushing up prices and squeezing out those at the bottom of the chain who are competing for fewer and less affordable homes.
Combined with the rise of short-term letting, an unstable investor market, and an inadequate supply of social housing, this structural shift in the private rental sector is having a profound social and economic impact.
“We talk about trickle-down economics – that’s absolutely at play in the rental market in the most brutal form,” said Kate Colvin, national spokesperson for housing affordability campaigner Everybody’s Home.
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Soaring demand, dwindling supply and skyrocketing prices is causing a severe rent crunch in Australia. Picture: Getty
South East Links is a support organisation that covers a fast-growing part of working-class Melbourne, including suburbs like Oakleigh, Springvale, Dandenong, and Pakenham.
Its chief executive officer Peter McNamara said an increasing number of people on low incomes or benefits were being locked out of the rental market.
“You’ve got little or no chance,” Mr McNamara said.
“You’re up against people who are offering to pay six months’ rent in advance if that’s what it takes to secure a place to live. What chance have you got? If you’re struggling with the cost of living on $46 a day or you’ve got insecure work, how can you have six months of rent saved up?
“What percentage of that population has $10,000 in the bank?”
Structural market change takes hold
While current commentary surrounding the Australian housing market is all about the impact of dramatic interest rate rises and predictions of double-digit falls in prices, it’s easy to overlook the bigger picture.
Since 2001, median house prices in Sydney have risen by an astonishing 269%, from $322,500 to $1.19 million. In Melbourne they’re up by 296%, rising from $225,000 to $891,000, and in Brisbane there has been a 381% surge, from $178,700 to $860,000.
But even at those seemingly modest 2001 prices, mid-to-high income earners were beginning to struggle with affordability and forced to stay in the rental market longer.
More and more Aussies are renting - and for longer - which is hurting those at the bottom of the market. Picture: Getty
A report by the Australian Housing and Urban Research Institute released in March 2020 found that “the private rental sector has been growing since 2001 at twice the rate of all households and at an accelerating rate in the 10 years from 2006 to 2016”.
It found that barriers to first-home ownership, particularly in capital cities, had contributed to “important structural changes in the private rental sector”, including an increase in dwellings with mid-market rents, and an increase in private rental households at mid-to-higher income levels.
The pandemic property price boom, which came after that report was released, brings those findings into stark relief.
“People are being squeezed out of homeownership, so they stay in rentals longer, and in turn they’re squeezing out the people who would normally be renting cheaper properties,” Ms Colvin said.
“So, they’re having to go to even cheaper locations. At the bottom, people are squeezed out altogether and that’s the group who are the lowest paid workers and the most insecure workers.”
Chris Martin, senior research fellow at the University of New South Wales’s City Futures Research Centre, agreed.
“Rental households have changed,” Dr Martin said.
“More people are renting longer into their primary income-earning years. And more high-income households are renting – a couple of decades ago, they would have been in a home of their own.
“There has been a declining homeownership rate. People are being denied access to it because of rising house prices.
“Those dual-income households in their primary income-earning years can afford to pay more rent so they get ahead of low-income earners in the rental allocation process.”
The Airbnb effect is adding pressure
Another change in the Australian rental market has been the growing popularity of short-term leasing over the past decade, facilitated by companies like Airbnb.
While short-term rentals have always been popular in regional holiday spots, tech giants have brought the concept to the capital cities, taking over properties that would otherwise have been available to long-term renters.
Multiple factors are seeing the supply of rental properties dry up. Picture: Getty
Data tracking company airdna monitors 11,043 Airbnb listings in Sydney, of which 71% are entire homes. In Melbourne, it monitors 15,526 dwellings, 82% of which are entire homes.
Another data tracking service, Inside Airbnb, reports that average annual income for recent and frequently booked short-term rental homes in Sydney is $36,966, or $709.73 a week, which compares favourably to the current median weekly rent of $620.
In Melbourne, average annual income for frequently booked Airbnb homes is $31,402, or $603.88 per week, significantly higher than the city’s median weekly rent of $460.
But here’s the kicker. In both cities, these in-demand properties are occupied less than 50% of the year. At the same time, long-term rental vacancy rates in Sydney and Melbourne remain at low levels, 1.5% and 1.7% respectively, according to SQM Research.
Once confined to holiday markets, short-term letting is now the norm in cities and suburbs. Picture: Getty
“The short-term rental business complicates the rental picture further,” Dr Martin said.
“It has a number of impacts. Firstly, landlords may see a more profitable alternative in Airbnb and switch out of long-term renting into that market. And it opens opportunities for people to take a position in in rental housing as a way of financing second homeownership, or a holiday home.
“That way, the owner of a property can monetise it when they’re not using it.”
The investor dilemma
If there’s one solution that most economists agree upon when it comes to easing the housing crisis, it’s increasing rental supply.
But regulatory buffers in the investment lending market have had a negative impact for tenants.
A directive issued by the Australian Prudential Regulation Authority in 2014, aimed at cutting lenders’ exposure to interest-only loans and loans with low deposits, acted as brake on investors and saw the beginning of a sharp drop of supply into the rental market.
According to APRA, “through-the-year investor credit growth more than halved from 10.8% in May 2015 to 4.6% by August 2016”.
At the same time, “the proportion of loans with small deposits declined and bank assessment of home loans improved”.
There simply aren't enough homes for renters. Picture: Getty
Cameron Kusher, executive manager of economic research at PropTrack, said the move heralded a fickler investment market that still persists today.
“As a result, investors were charged higher interest rates and it became much harder for them to take out loans, which saw investment fall,” Mr Kusher explained.
“Not only that, but existing investors started to sell out of their properties as well.”
Investors hit another brick wall when Covid arrived.
“Through the pandemic, we saw a lot of investors sell out and there are a few reasons for that,” said Mr Kusher.
“If you owned an apartment in Sydney or Melbourne, it became very hard to lease. And elsewhere, apartments in places like South East Queensland and Western Australia, where prices hadn’t increased for many years, started seeing some growth, so owners took the opportunity to break even or make a small profit.
“And then you had people selling their investment properties in order to upgrade their principal homes.”
In addition, the pandemic saw many people who were technically investors buy properties to use as holiday homes or family retreats.
“They are investment properties that are not being made available to rent,” Mr Kusher said.
With surging home prices and reduced rental yields in recent years, Dr Martin said there was little incentive for investors to commit to leasing their homes in the long-term.
“There’s a big turnover – landlords enter the rental sector and leave,” he said.
“In particular, they leave for owner-occupiers, or owners who put the homes in the tourism market, and that hole in the rental sector suddenly becomes much deeper.”
Inadequate social housing
With disadvantaged people and low-income earners facing the pointy end of this rental crunch, the provision of social housing has never been more important.
The new Federal Government has championed its $10 billion social housing fund, which will build 30,000 social and affordable homes across Australia within five years, beginning in 2023.
There are other programs operating at a state level, like Victoria’s $1 billion Big Housing Build will see the development of more than 2300 homes across metropolitan Melbourne and regional Victoria over the next few years.
But with a national social housing waiting list sitting at an estimated 160,000, it’s not going to be nearly enough – or soon enough.
“We absolutely need governments to invest in more social housing,” Ms Colvin said.
“There’s a shortage of affordable rental properties and social housing is perfect for that because it’s targeted at the lowest income market. It can take households out of homelessness.”
The rent crunch is pushing some people into homelessness. Picture: Getty
Dr Martin said the social housing sector was in a long-term decline and it needed to be rectified.
“That sector has been on starvation rations for a number of decades, since the mid-1990s when the Howard Government slashed its funding,” he said.
“There have been a couple of periods since then – the Rudd Government had a stimulus package after the GFC, and a couple of state governments have broadened social housing spending – but that sector has been in decline over the past half century.
“It’s part of the struggle that low-income renters are facing. There’s less public and community housing stock available and in the private sector they’re competing with high-income households who’ve been priced out of home ownership.”
There has been a significant underinvestment in new social and affordable housing for decades. Picture: Getty
Mr Kusher said governments had effectively left the rental market to the private sector.
“It’s been pretty terrible over the past few years,” he said. “A lot of governments have been selling off their social housing and there has been a reduction in new builds. They’ve outsourced the supply of rental properties to the private sector.
“These new government schemes are better than nothing, but it’s not going to be enough.
“The only real solution is to get more investors into the market but it’s not a popular thing to say and it’s not a popular thing to support.”