Sounds familiar:
For Meg Edwards, it was $30 that sealed the deal.
The 20-year-old international relations student and her two housemates were struggling to find a home in Melbourne’s hypercompetitive, inner-city rental market, having inspected close to two dozen properties over the course of a couple of months.
“It was getting pretty stressful,” Edwards tells AFR Weekend. “There’s one place where we were calling the agent every day to make it really clear that we were interested.”
The real estate agent for the three-bedroom terrace house in North Melbourne told the trio they would need to offer more than the advertised $770 price if they wanted to stand out from the other 25 applicants and have a chance of securing the property.
“So we did end up doing that, and we did end up getting it,” Edwards says, with the group offering $800 per week for the home. “Obviously, we were pretty lucky to be able to do that. But not everyone can.”
What happened to Edwards and her friends was a clear breach of Victoria’s tough rental-bidding laws, which state higher offers cannot be solicited by an agent. Unfortunately, with Australia in the grip of what experts say is a rental crisis, what happened to the group is not likely a one-off.
Advertised rents have galloped 10 per cent higher in the past 12 months, research house CoreLogic says, and that adds to the cost-of-living pressures households already grapple with, such as soaring energy bills and grocery prices.
Worse, moving to a cheaper rental isn’t an easy alternative. Finding a place to live is harder now than at any time in at least two decades, with just 1.1 per cent of the nation’s stock of rental properties available for lease.
The country’s rental market is clearly out of balance, says Brendan Coates, the Grattan Institute’s economic policy program director.
“The rule of thumb vacancy rate for a healthy rental market – one where renters can find somewhere to live that suits their preferences and budget in a reasonable time frame – is around 3 per cent,” Coates tells AFR Weekend.
The situation is even worse in smaller capital cities such as Adelaide and Perth, where fewer than 1 in every 200 rental properties were vacant in February.
But the crisis facing renters, with few vacancies and rapidly rising prices, didn’t arise overnight. It’s the inevitable consequence of what happens when high, and rising, demand collides with limited supply. That, in turn, is the result of decades of policy failure and inaction across all levels of government. It took the pandemic, with its resulting inflation outbreak and flood of immigration, to bring it to a head.
It’s a problem being felt around the world. But in this country it is happening alongside forecasts for chronic underbuilding, property prices that have increased so rapidly that an entire generation of Australians believe home ownership is out of reach, and a system that treats property as just another asset class, favouring landlords at the expense of renters.
Finding a way out of this big squeeze won’t be easy.
Immigration and the ‘race for space’
On the demand side, Coates says a shift toward living in smaller households has contributed to the extraordinary tightness in rental markets.
“In a hybrid work world, people want more space to themselves and to live in smaller households. This means for a given number of renters, we need more rentals to go around,” he tells AFR Weekend.
The average number of people living in a household fell to 2.55 in 2021 from 2.59 in 2016, analysis of census data by real estate analysts at PropTrack shows. That means 160,000 more dwellings are required to meet the housing needs of the population.
“The ‘race for space’ started during COVID-19 and had a more subdued effect because borders were closed and there were no arrivals,” Coates says. “Now that migration has come roaring back, we have both more people and each person wanting more space.”
Treasury forecasts an influx of 650,000 migrants between this financial year and the next, as the reopening of Australia’s borders prompts the return of international students, working holidaymakers and skilled migrants, who are in high demand thanks to a chronic shortage of workers.
Coates says the migration boom contributes to the dwindling availability of rentals, as migrants compete with locals to snap up a shrinking number of homes for lease. “The more people there are, the more houses we need. And we are adding people a lot faster than we are adding houses,” he says.
Centre for Independent Studies chief economist Peter Tulip says the federal government has an obligation to help fix the problem of inadequate housing supply given it is responsible for the immigration program. “Canberra needs to ensure that new migrants have somewhere to live,” the former RBA researcher tells AFR Weekend.
The migration surge is bad news for renters in Sydney and Melbourne, where property markets are expected to bear a disproportionate share of the burden of the influx, given their popularity with international students.
Compounding the problem is that the boom comes as the construction industry is scaling back its plans to build more homes, burnt by rising interest rates and soaring material costs that have pushed a raft of builders into bankruptcy.
It means Australia will fall short of its housing needs between 2023 and 2027 by 106,300 dwellings, a report released on Monday by the government-run National Housing Finance and Investment Corporation said.
The rise of NIMBYism
A major handbrake on new housing supply has been the influence of existing homeowners who object to new developments in their communities. Known as NIMBYs (Not In My Backyard), their power is derived from their sheer number.
Twice as many Australians own property than rent – about a third of households own outright, and another third are paying off a mortgage – and to much of that cohort nearby development equates to putting their lifestyle and the value of their property at risk.
As such, the path of least resistance for politicians is to accommodate the will of a homeowning class through tough planning laws that restrict medium- and higher-density construction.
Limiting what can get built and where it’s built restricts the supply of new homes, making life harder for renters and prospective first home buyers by driving up rents and house prices. The problem is most evident in wealthy areas, where demand for new housing is high but very little is being built.
Councils in Sydney’s affluent eastern suburbs and lower north shore were the city’s most anti-development local government areas, CIS’ Tulip’s research showed last month. While the research only looked at Sydney, the findings would almost certainly translate to other housing markets.
Tulip found that council areas like Woollahra, Hunters Hill and Mosman built almost no new homes over the past few years. Between 2016 and 2021, Woollahra council built just 61 homes a year, while Hunters Hill – the smallest council area in Sydney – gained 12 homes annually on average and Mosman built 33 homes a year. The figures equate to tepid 0.2 per cent annual growth in the dwelling stock in each of the three harbourside locales.
Tulip found that most building took place in Sydney’s western suburbs, even though demand for housing was highest in the city’s inner and eastern suburbs.
While some planners argue that NIMBYs are not important since technical panels – not residents – make planning decisions, Tulip says it’s more complex. “The panels are guided by parameters set by politicians. And the politicians set restrictive parameters because they perceive their voters would object to new housing,” he says. “So the implication of this claim that public opinion is not driving planning decisions is false.”
Concerns about higher density developments harming neighbourhood character, which drives opposition to new homes from residents, are misplaced, Tulip says.
“There are lots of stories of people who opposed developments before they were built who then change their mind after seeing the final outcome,” he adds. “In particular, they like the new shops, restaurants and transport services that accompany higher density.”
In Sydney suburbs dominated by high-rise, such as Chatswood, Green Square and Liverpool, Tulip says house prices didn’t fall when development increased, in a sign that the lift in density had no effect on amenity. “I suspect that NIMBY opposition is just fear of the unknown,” Tulip says.
No silver bullet
Because the problem with the housing market stems in part from government policy, relief for renters can only come from government intervention. In the short-term Coates says the immediate priority for the federal government should be to increase rent assistance, which is a supplementary payment made to people on welfare who are also renting.
“Rent assistance works,” Coates says. “In 2021, it reduced housing stress levels for recipients nationwide from 72 per cent to 46 per cent.
“But the maximum rate of rent assistance hasn’t kept pace with the rising rents paid by low-income renters.”
For a single, the maximum fortnightly payment is $157.20, or just $79 per week, and research by economists at AHURI found that over one-third of recipients were still in rental stress after the payment was considered.
Rent assistance was already too low, even before the latest rental squeeze, says Australian National University associate professor Ben Phillips.
“Over the longer term we know that low-income renters are increasingly struggling and for that rent assistance is one part of the answer while the other part is some rebuilding of public housing and encouraging other forms of social housing and rental investment in lower cost housing options,” Phillips says.
A 40 per cent increase in rent assistance would cost the federal government about $2 billion, the Grattan Institute says, but it would go straight towards easing the cost of living for those struggling the most in the private rental market.
One way to pay for the increase would be to make the payment better targeted, with the Australian Housing and Urban Research Institute estimating that 419,000 renters on moderate incomes receive rent assistance, while some renters on low income are missing out.
In a report last year, the Productivity Commission said an increase in rent assistance should be a priority, citing the fact the value of the payment had declined over time relative to rents, while urging the federal government to make the support better targeted.
Coates says there is also a case for state governments to lift the rate of land tax applying to short-stay accommodation platforms like Airbnb to encourage owners to return the properties to the rental market.
“That would come with a cost because fewer Airbnb would mean less regional tourism, and therefore fewer regional jobs. But it would be better than seeing families in regional Australia living in caravan parks, tents and cars.”
He also says state governments should consider expanding “hard leasing”, where the public sector takes out a lease on private rentals and sublets them to vulnerable people. Coates says governments should also buy existing homes and turn them into social housing.
ANU’s Phillips says purchasing existing dwellings would be an easy way for the government to increase the stock of public housing. “This has the advantage of being more timely but also removes the issue of public housing concentrating disadvantage in one small area.”
Build more homes
In the long run, most experts say the only solution is to relax planning laws and build more homes.
“This is the recommendation of a succession of official reports into housing affordability,” Tulip says, referring to reports by the Productivity Commission and former RBA governor Glenn Stevens. “Those reports, in turn, summarise a mountain of academic research from Australia and overseas.“
Tulip says governments need to set and enforce high housing targets for local councils, while also funding infrastructure that would allay concerns about overcrowding. “This preserves local control over the type and precise location of new construction, without letting local residents restrict the supply, as they otherwise would.”
Coates says the focus needs to be on building both government-owned social housing and market rate homes.
Grattan Institute research found the stock of government-subsidised social housing, which stands at 430,000 dwellings, had barely increased in 20 years even though the population had increased by more than a third.
“The Senate should pass the Housing Australia Future Fund (HAFF) bill so we have a healthy stream of funding to help grow our social housing stock in line with population growth, and the fund should be increased from $10 billion to $20 billion,” Coates says.
The HAFF is one of the Albanese government’s two signature housing initiatives, but it lacks Senate support, with the Greens and Independent Senator David Pocock saying it doesn’t go anywhere near far enough given the scale of the problem.
And Tulip says the $10 billion initiative, designed to fund 6000 social and affordable homes per year, is close to useless. “Thirty-thousand new subsidised dwellings over five years is not much more than a rounding error in a housing market with hundreds of thousands of new households each year,” he says.
Labor’s other major policy – an accord with the states to build 1 million homes over five years – has also been criticised for a lack of ambition and insufficient detail. But despite questions over how it will operate, Coates says the accord has the potential to be a game changer.
“But that will only happen if the Albanese government puts enough money on the table to push state and territory governments to ease land-use planning rules, to enable more housing, including more high-density housing, to be built.”
Tough times
The bad news for renters is that the situation will probably get worse before it gets better. An increasing population, a subdued construction pipeline and inaction by federal and state governments means people who don’t own their own home should brace for more rent rises.
Together with already-high property prices and the likelihood that higher mortgage rates will make it even tougher for new buyers to get into the market, the rental crisis is just a part of a longer-term problem.
Australia’s housing economy, and broader social compact, is based around people owning their home by the time they retire. For many who don’t, paying ever-rising rents with modest super and pensions will be unaffordable.
While Tulip concedes it will be politically difficult to relax planning laws and build more homes, he says there is no alternative.
“It will be difficult to get meaningful improvements in affordability until we see a change in social values,” he says. “As a society, we need to show more concern for renters and future homebuyers and less concern for wealthy busybodies.”
Edwards, who is still settling into her North Melbourne home, says enforcing existing rules around rental bidding would make the market fairer.
“[Bidding] just completely rules some people out, which is just not fair. Because some people can offer more money doesn’t really mean that they’re going to be a better tenant.”
While she only signed a one-year lease, Edwards wouldn’t mind staying longer. But under the rules of Australia’s rental market, the decision won’t be entirely her own.
Source: Record immigration, nowhere to live. Welcome to Australia’s rent crisis
Multicultural Meanderings 