May 2023

Real Estate Round Up #58

This month, the Sydney housing market has been grappling with a series of significant challenges. The most pressing issues include soaring rental prices, a shortage of housing supply, and an economic outlook that has been significantly impacted by these issues.

The Real Estate Institute of New South Wales (REINSW) has described the current situation as a “housing catastrophe” that requires “brutal action”(1). This strong language underscores the severity of the situation, as the housing market’s dysfunction becomes a growing political and economic flashpoint(7). The surge in prices has contributed to the burden on new home buyers, affecting the amount of debt they hold or the size of the deposit required to get into the market(7). The fall in interest rates between 1994 and 2017 accounted for a third of the 109% jump in median house prices, which has offset the reduced cost of mortgage finance for home ownership(7).

The rental market, in particular, has seen dramatic changes. Reports highlight the strongest annual rental increase in history across Australia’s capital cities(2)(4). In Sydney, the most expensive rental market in the country, unit rents rose 1.9% in April, contributing to a record annual increase of 19.1%(9). This equates to an extra $106 per week, or almost $5,500 more per year, for renters(9). This increase in rental prices is putting a significant strain on renters, particularly those in lower-income brackets.

The supply shortage is a significant factor driving these increases. A report by CoreLogic reveals that rental vacancy rates as of April 2023 were 1.1% nationally, well below the decade average of 3%(11). In the same period, total rent listings were 38.1% below the previous decade average(11). This undersupply, coupled with an increase in renters, is deteriorating affordability, with 30.8% of income required to service a new lease nationally for a median income household(11). For lower-income households, this figure rises to 51.6%(11). This indicates that the rental market is becoming increasingly inaccessible for a significant portion of the population.

Economic Outlook

The economic outlook is also being affected by these trends. The housing market’s dysfunction is becoming a growing political and economic flashpoint(7). The surge in prices has contributed to the burden on new home buyers, affecting the amount of debt they hold or the size of the deposit required to get into the market(7). The fall in interest rates between 1994 and 2017 accounted for a third of the 109% jump in median house prices, which has offset the reduced cost of mortgage finance for home ownership(7).

In response to these challenges, various solutions have been proposed. One suggestion is the creation of trusts or businesses that would own hundreds or thousands of rental properties, with potential property investors putting their money into these trusts or businesses rather than owning an individual property(7). This approach is widely used across the rest of the world and could be a game-changer for the rental market(7). However, the tax system makes pooling investors into the property market difficult(7).

The NSW government is also taking action, moving to abolish the Coalition’s first home buyer land tax choice and replace it with increased stamp duty exemptions(8). From July 1, first home buyers will not have to pay stamp duty when purchasing a property to the value of $800,000, potentially saving them $31,000 in stamp duty when buying an $800,000 property(8). This policy change is expected to make home ownership more accessible for first-time buyers. However, the opposition has vowed to try to block the repeal of the land tax choice, which was a signature policy of the previous Perrottet government(8).

Another perspective on the issue comes from Ray White Chief Economist Nerida Conisbee, who argues that the rental debate has been derailed, with the dominant messaging suggesting that owners of rental properties and companies providing new housing need to be punished(10). She suggests that a more rapid way to increase rental supply would be to incentivise the two groups that already provide most of it: mum and dad investors and foreign buyers(10). She also highlights the challenges of town planning and rapid interest rate rises, which are strangling the pipeline of housing supply and leading to fewer rental properties(10).

The ANZ CoreLogic Housing Affordability Report provides further insights into the state of affordability in the Australian rental market and the many ways in which the pandemic has influenced the supply and demand of rental accommodation(11). The report found rental affordability – the portion of income required to service a new lease – is at the highest level since June 2014, with 30.8 per cent of income required to service a new lease nationally, for a median income household(11). At the lower household income level, 51.6 per cent of income would be required, suggesting particular pressure for households at the 25th percentile income level(11).

In conclusion, the Sydney housing market is facing significant challenges, with soaring rental prices and supply shortages impacting the economic outlook. While various solutions have been proposed, including the creation of rental property trusts and increased stamp duty exemptions, these face their own challenges. It is clear that further government and regulatory interventions will be necessary to address these issues and ensure the affordability and accessibility of housing in Sydney.

References:

  1. [REINSW: Housing catastrophe needs brutal action](https://www.therealestateconversation.com.au/news/2023/05/03/reinsw-housing-catastrophe-needs-brutal-action/1683073179)
  2. [Australia’s capital cities record strongest annual rental increase in history: CoreLogic](https://www.therealestateconversation.com.au/news/2023/05/03/australias-capital-cities-record-strongest-annual-rental-increase-history-corelogic)
  3. [The key compromise that can save Sydney home buyers up to $380,000](https://www.domain.com.au/news/the-key-compromise-that-can-save-sydney-home-buyers-up-to-380000-1211201/)
  4. [Australia’s capital cities record strongest annual rental increase in history](https://www.corelogic.com.au/news-research/news/2023/australias-capital-cities-record-strongest-annual-rental-increase-in-history)
  5. [Rental freeze cap policy lease renewal rental affordability](https://www.abc.net.au/news/2023-05-12/rental-freeze-cap-policy-lease-renewal-rental-affordability/102331576)
  6. [4 ways to bring down rent and build homes faster than Labor’s $10billion housing fund](https://theconversation.com/4-ways-to-bring-down-rent-and-build-homes-faster-than-labors-10billion-housing-fund-205643)
  7. [The rental market: an unhappy marriage headed for divorce](https://www.smh.com.au/politics/federal/the-rental-market-an-unhappy-marriage-headed-for-divorce-20230518-p5d9jm.html)
  8. [NSW government to scrap first home buyer land tax choice](https://www.abc.net.au/news/2023-05-22/nsw-government-to-scrap-first-home-buyer-land-tax-choice/102374238)
  9. [Rental affordability gap slashed; national unit rents only $39 a week cheaper than houses – CoreLogic](https://www.therealestateconversation.com.au/news/2023/05/30/rental-affordability-gap-slashed-national-unit-rents-only-39-week-cheaper-than)
  10. [The rental debate has been derailed – Ray White](https://www.therealestateconversation.com.au/news/2023/05/29/the-rental-debate-has-been-derailed-ray-white/1685320980)
  11. [Increasing demand and an undersupply of accommodation impacts affordability for Australian renters – CoreLogic](https://www.therealestateconversation.com.au/news/2023/05/29/increasing-demand-and-undersupply-accommodation-impacts-affordability-australian)