Australia's rental crisis spiralling out of control

Australia’s rental crisis is moving into dangerous new territory, with entire states lacking any suburbs with decent rental prospects, rent costs on a record run of increases and supply of new rental properties drying up.

For every private vacant property in the country there are 534 people.

A survey of the Australian rental market has revealed that there are now only 49,000 vacant private rental properties in Australia to cater for a population of 26 million people.

Property commentators are running out of superlatives to describe the scale of the problem as quickly as governments are running out of ideas and schemes to resolve it.

The rental crisis is spiralling out of control.

- Tim McKibbin, Chief Executive Officer, REINSW

Building approvals have been decreasing - this is not good news for renters.

- Jim Malamatinas, Director, A Game Property Advisory

The rental crisis is not only impacting major cities but even small towns throughout Australia.

- Kevin Young, President, Property Club

Rents have now risen for the previous five consecutive quarters and unit rents for the preceding four, making this the longest continuous stretch of rental price growth Australia has ever experienced.

A new report from surburbtrends.com commissioned by A Game Property Advisory found two key factors have contributed to the cause of this crisis and will continue to see it worsen:

1. Low Pipeline building approvals - which mean there will be a low number of new dwellings that will convert into rental properties
2. Planned rebooting of immigration - to 235,000 people a year. This will continue to drive rental demand well ahead of available or future supply, and particularly impact inner-Sydney and inner-Melbourne the most given high intakes of international students and migrants more generally.

“Relief is likely to come via new housing stock, but based on ABS data, building approvals have been decreasing - this is not good news for renters.

“Builders and developers now must deal with increased red tape and the soaring cost of materials and labour and there’s little relief in sight – certainly in the short term,” Mr Malamatinas said.

“Residential developments are becoming increasingly difficult to navigate, with cost blowouts and material shortages, meaning rental relief is not easily fixed.

“Investors wanting to secure a property to inject into the rental market need a cool head and a steady hand to guide them - it’s not a quest for the faint-hearted.”

Policy paralysis

The scale of the problem is truly national.

Falling property prices have deterred new investors from entering the market, state-based tax and stamp duty regulations are scaring off many investors and demand for rental properties continues to rise.

SQM Research data shows that the national vacancy rate has just fallen to 0.9 per cent, the lowest figure since early 2006, when it touched at 0.8 per cent soon after their records began. A healthy rental market vacancy rate is deemed to be 2-3 per cent.

The good, bad and ugly suburbs nationally (vacancy rate in brackets)

Source: surburbtrends.com (commissioned by A Game Property Advisory)

To determine a national list of Good, Bad and Ugly (Worst) suburbs nationally the methodology of the report consisted of the following 4 variables:
Rental tenure – At least 25% of the housing supply in the suburb must be rented/available for rent to enter our analysis
Vacancy rates – Good suburbs defined as having a vacancy rate of over 1.5%, Bad and Ugly as below 1.5%
Rental price increases – Good suburbs are defined with having no rental increase of over 5% in the last 12 months and Bad and Ugly suburbs having experienced a rental increase of over 5% in the last 12 months
Suburb rental affordability ratio – Good suburbs are defined as having a ratio of no more than 30%. This means that on average a household is not allocating more than 30% of weekly income to rent. The final list is then sorted by affordability with the lowest percentage selected

Nobody is betting against the situation worsening to record lows.

Mr McKibbin said well-meaning governments were often exacerbating the problem.

“Property investors are exiting the market in significant numbers and yet still some politicians and market commentators are floating reforms that make investing in property an even less attractive prospect,” the Real Estate Institute of New South Wales CEO said.

“More than just short-sighted examples of electioneering, these policies are downright damaging. 

“Ideas like rental freezes and no grounds evictions not only threaten to make the rental supply situation worse, they are actually making it worse.

“Investors are being driven out of the market when demand for rental property is escalating at a far greater rate than supply can keep up.”

Even the bidding wars that are erupting when a rental becomes available, and subsequent high rental yields, are not enough to entice investors at the moment, he said.

“Prospective tenants in many cases are offering to pay well above the asking rent to secure a lease, knowing how narrow their options are.

“It’s supply-demand 101 and yet the reality is, landlords are selling faster than investors are buying.

“Policies that seek to protect tenants by imposing limitations and burdens on landlords are having the demonstrable opposite effect and tenants are the ones losing out.”

Kevin Young, President of Property Club, said that faced with their mortgage repayments doubling by being forced from interest only to principal and loans, Club members have sold more than 30,000 rental properties that could have been still available to renters throughout Australia.

“New lending rules imposed by APRA that limit the length of interest only loans for investors, alone, has resulted in Property Club owners selling half their properties over the past four years.

“The abolition of depreciation benefits associated with buying second-hand rental properties has also resulted in a dramatic reduction in the supply of more affordable older style houses for renters over the past four years.

“Property Club has projected that Australia needs at least a million additional rental properties over the next five years to solve our rental crisis and significantly reduce homeliness by making rental properties more affordable.

“The opposite is now happening, with the supply of rental properties now shrinking because of higher interest rates and bad government policies directed at landlords covering interest-only loans and depreciation for older properties,” he said.

States of despair

No state escapes unscathed from the distressing analysis of the rental market.

Outside of NSW and Victoria, which have their own problems, the other states and territories have a total of just seven suburbs between them that are rated as ‘good’ prospects for renters.

Queensland’s rental market has taken a major turn for the worse with the announcement of a contentious land tax that from next year will be based on the value of assets held anywhere in the country, not just in that state.

A survey by Property Investment Professionals of Australia (PIPA) found that a staggering 45.1 per cent of investors had sold at least one property in the Sunshine State in the two years to August this year.

Nearly 30 per cent of rental dwellings have been stripped from the Queensland market in two years, as more than 160,000 investment properties were potentially sold to homebuyers.

In a sign of more rental stress to come, 19 per cent of investors nationwide have signalled they intend to sell even more property over the year ahead, with the number one reason being Queensland’s new land tax law.

PIPA Chair Nicola McDougall said it was clear investors have had enough of being the cash cow for all levels of government.   

“From Coolangatta to Cairns, investors have deserted the Queensland market over the past two years, with more rental pain on the horizon as well,” Ms McDougall said.

The problem extends to the regions too. In the Queensland town of Longreach, with a population of 3,000 people, there are currently just four rental properties for rent.

“We had an inkling that investors had been selling their holdings over the past year or two, but these results show that even we had underestimated the volume of rental properties that have been jettisoned from the market.”

Back to the parents

Another less publicised result of the rental crisis is the shift in household demographics as adult children flock back to the financial security of their parents’ homes.

A survey by Finder concluded that 13 per cent of Australians – equivalent to 858,000 households – have had an adult child move back home in the past 12 months.

Of those who moved back home or had their adult children move back in, almost 1 in 3 (31 per cent) did so due to rental affordability concerns.

A whopping 35 per cent moved back or had a child move back to save money for a home deposit – equivalent to 300,000 households.

Despite record low unemployment, 19 per cent of those who moved home or had a child return were forced to do so because of the loss of a job.

Sarah Megginson, senior editor of money at Finder, said some Aussies had been forced to make significant changes to their lifestyle.

“Interest rates are going up and the cost-of-living pressure is coming from all angles, making it difficult to juggle everything at once.”