September 2022

Real Estate Round Up #50

This month the cost and number of shrinking rental options appears to be the main property industry headline. This apparent firestorm has been brewing for a while with a number of contributing factors, but not everyone agrees on all aspects. Domain says that strong demand and short supply has massively increased competition, and as a result, fewer than 1% of rental properties have been left empty in August.

Despite stories showing long queues for renters to inspect a property, this article in the Conversation argues that the growth of actual rent costs (as opposed to advertised or asking rents costs) has only grown by 1.6% in the 2022 year to June, compared to 8.2% for advertised rents, and notes ‘most’ renters remain by default on their existing contract once it expires, for example.

So the question may be more one of availability than of cost; of supply rather than demand.

As part of a comprehensive analysis, The ABC has listed 7 factors at the core of the rental crisis:

  1. Household sizes have shrunk, effectively creating more, smaller households, each needing its own home.
  2. Lack of social housing has forced more vulnerable households into private rentals
  3. People are renting for longer as they can’t afford to buy
  4. Many investors sold their properties when prices were at their peak over the last 12 months, removing homes from the rental market
  5. Overseas migrants and international students are returning and this is putting extra pressure on the rental market
  6. Landlords may be increasing rents to compensate for rising interest rates
  7. Some investors are finding using their properties for short term rentals are more profitable

More pro-actively, the same article also provide 7 things that could go some distance to fixing the crisis. Most if not all of these fixes are longer term and will require either oversight, policy change, regulation and/or investment. In other words, leadership:

  1. improve rent assistance for low-income earners
  2. Build more social housing.
  3. Reform planning rules so more homes can be built in specific areas
  4. Make renting more secure and longer term
  5. Improve ways for people to ‘rightsize’ their home (for example, stamp duty is often cited as a barrier to this).
  6. Help more people to enter the property market
  7. Encourage short term holiday rentals onto the long term rental market

Apart from all that, there are other more niche situations causing stress for renters such as if the landlord defaults on their mortgage. A related article also shows that distress sales are on the rise, which is not helping the rental market either.

One major solution as suggested by amongst others is a vacant property tax to try to ease affordability for home owning or renting. The article refers to the sitting on of empty properties as a type of ‘land banking’, which sounds funny until considering the potential selfishness it implies in the current climate. As the article states:

“…at the heart of it is the uniquely Australian view that property is not just purchased as a place to live, but as a vehicle to accumulate long-term personal wealth.”

With the rising price of undeveloped residential land demonstrating that supply is not keeping up with demand, this article from The Real Estate Conversation cites ABS data that knockdown rebuilds are increasing, and that this is creating a new focus for construction opportunities. Despite that, Domain cites ABS research that new building approval are down 17.2% for July (down 25.9% for the year so far), and that this suggests a worsening (‘chronic’) housing shortage from 2023.

Ultimately, it appears that the combination of rising interest rates and construction costs are having a pretty big effect on reducing the number of new building approvals, and that this in turn may increase competition for the existing stock over the longer term.