Category: Rental Crisis

The Federal Budget’s fumbled opportunity

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The argy-bargy of political wrangling always seems to include collateral damage. Parties come out swinging with a host of policies they say will help some group or another. They want to appear to be doing the right things – or, at least, the most popular thing. It’s important for the pollies to get the voters onside or risk being out of a job. But the outcomes of this to-and-fro often fall short with constituents left wanting.

Unfortunately, the current rental crisis is highlighting this reality. In fact, comments from Sarah Hunter, Assistant Governor of the RBA, during her presentation at the REIA Centennial Congress in Hobart in May this year have me convinced a golden opportunity to address this burning issue has been missed during the Federal Budget’s announcement.

The numbers don’t lie

Unless you’ve been hiding under a lump of rock on the dark side of the moon for the past few years, you’ll be aware we are enmeshed in a rental crisis of historic proportions.

Around the nation, rental markets are running at ridiculously low vacancy rates – almost all are under two per cent, with many at or below one per cent. Locations have seen rents rise quickly in response.

In fact, the latest inflation figures from the ABS show rent is rising at around 7.5 per cent annually. That’s more than double the overall increase in CPI.

I found Ms Hunter’s comments on this particularly compelling. She used her platform to explain exactly why housing and rental markets are under so much stress.

“Underlying demand for housing, whether people rent or own their own home, is fundamentally determined by the size of our population and the number of people that live (on average) in each dwelling,” Ms Hunter said.

“Right now, just under 27 million people live in Australia, in about 11 million households. The average number of people living in each household has trended lower, from around 2.8 in the mid-1980s to around 2.5 of late. This may sound like a small change. But, if for some reason average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference.”

Graph of the drivers of underlying demand for housing, comparing average household size with yearly population growth. The graph shows a declining trend in average household size, contrasted with a rapid increase of 2 percent in the yearly population growth for the years 2020 to 2024.

Essentially, she has that said population growth (including record gains in migration) coupled with decreasing household density has created a demand for shelter of monolithic proportions.

The Assistant Governor also put paid to the idea that rising interest rates are driving rents higher. While it’s true property owners with mortgages have been dealt a tough hand with rates rising in 2022 and 2023, the cost of cash has little influence on rents in reality. Like most things property related, it’s the market – or more specifically, demand versus supply – that dictates the direction of rents.

As Ms Hunter explained:

“At first glance, it does appear that there could be a positive relationship between interest rates and market rents – the two often move together. However, our preliminary analysis suggests that market conditions (captured via the vacancy rate) explain most of the movement in market rents, and there is little to no evidence of direct pass through to rents from higher interest costs in the short term.

“As such, the observation that market rents and interest rates move together appears to be a case of correlation, rather than interest rate rises causing rents to increase.”

Graph comparing the vacancy rate and rental price growth from 2000 to 2024. Both measures are overlayed, showing that they track fairly closely.

Put simply, rents have gone up because supply is too low and demand is high. Rents have not gone up because of interest rates.

The solution is that we need more rental properties and we need them fast.

Missed opportunity

There are a range of steps for our politicians to take, but they continually fail to do so. This is perhaps one of the most frustrating things about modern Australia.

For example, the recently announced Federal Budget did little to boost prospects for housing supply.

Sure, there were tax cuts, cost-of-living relief via measures like power bill rebates and a boost to rental assistance. But none of these encourage more housing to be built and made available for renters.

No… the budget was more band-aid than cure.

I believe there are a few steps which could have stimulated supply and started driving us back from the crisis.

Firstly, why weren’t there more incentives for developers to build housing? Construction cost increases, lack of labourers and timeline blowouts all eat into development margins. Tax breaks that reduce the financial burden would prompt developers to move ahead with projects faster.

There was also a chance for the government to establish low-interest construction loans. Increasing the availability of cheap, accessible finance would do wonders in getting more housing built by the private sector.

Planning roadblocks across jurisdictions need to be addressed too. Anything the federal government could have done to assist here would have been hugely beneficial. We need to end NIMBYism and support more construction by streamlining the planning processes and reducing costs.

Similarly, mum-and-dad property investors could use a break too. The absolute shellacking they’ve been copping from some politicians is abominable, despite the fact private landlords supply around 90 per cent of all accommodation in the rental market. Chants calling to end negative gearing and generous CGT allowances discourage these investors, ultimately leading to less housing for renters. Instead, let’s see pollies bolster their praise for everyday landlords and look to apply more carrot and less stick.

Yes, there are moves that need to be taken and it would have been great to see them lead from the top in this year’s budget. Unfortunately, it’s just another fabulous opportunity left withering on the vine of political wrangling.

Why Australia is facing a ‘devastating insurance crisis’ this summer

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A national property firm has warned that Australia is facing a “devastating insurance crisis” as this summers triple-dip La Nina threatens to financially ruin underinsured homeowners.

MCG Quantity Surveyors, which has offices in Brisbane, Sydney, Melbourne, Newcastle, Adelaide, Perth and Canberra, said that a combination of factors could lead to “one of most financially devastating” summers in recent history.

“What’s occurred with the floods in Victoria looks like an unsettling precursor for the summer ahead,” MCG Quantity Surveyors director Marty Sadlier said.

“I’m incredibly concerned this year’s La Nina will financially devastate a huge number of homeowners and investors who are substantially under insured.

“The last time a triple dip La Nina occurred was more than two decades ago from 1998 until 2001.

“Because we’ve already had two wet summers, dam catchments are up and water tables are high, so flood events this year will be more likely.

“We’re also still recovering financially from the previous two years of flooding which resulted in billions of dollars of damage throughout the nation.

“Along with the loss of life and property, these events have exacerbated other elements that will make things difficult.”

The Bureau of Meteorology officially declared that a third La Nina was underway on September 13, adding that above average rainfall was likely for eastern Australia during spring and summer.

A month later, the bureau’s long range forecast further warned of an increased risk of widespread flooding and an above average number of cyclones, with the potential for an earlier than normal tropical storm.

Since then, a relentless train of weather systems has delivered rain, storms and flooding to huge parts of the east coast, with parts of Victoria still under water.

“Residents and communities living on or near any rivers, creeks and streams or in low lying areas, especially in southern Queensland, much of inland NSW, Victoria and northern Tasmania are advised to stay up to date with the latest forecast and warnings,” a media release warned on Monday as more wild weather was forecast later this week.

To date, the insurance bill from the wild weather that slammed southeast Queensland and NSW in February and early March has hit a staggering $5.45 billion, with just over half of the 234,000 claims now closed, according to the Insurance Council of Australia.

It is the costliest flood in Australia’s history, and the fifth most costly disaster after the Sydney Hailstorm (1999), Cyclone Tracey (1974), Cyclone Dinah (1967) and the Newcastle Earthquake (1989).

But Mr Sadlier warned that a triple whammy of factors could make any widespread natural disaster this summer “financially devastating”, adding that every property owner should be checking their insurance coverage and getting their homes ready now.

RISING CONSTRUCTION COSTS

“Rising construction costs throughout the past two years means any insurance value assessments from 12 months ago could be redundant,” he said.

“Repairs to previously flooded property has seen the demand for labour and materials continue to skyrocket.

“If the heavy rains cause more widespread flooding again this year, expect to see our already strained construction industry put under further stress.”

Mr Sadlier said the fallout of such a scenario would be “dramatic” as construction costs were already at new highs, with timber going up by about 21 per cent and steel around 42 per cent.

UNDERINSURANCE

“Australia’s property owners are already substantially underinsured,” Mr Sadlier said, adding that research in 2020 suggested that a whopping 83 per cent of Australians were underinsured.

“Then in 2021, the Australian Bureau of Statistics noted that 2.44 million Australian households had no house and contents insurance – that’s 23 per cent of all Australian homes.

“In reality, I believe over 90 per cent of properties in Australia are not carrying adequate insurance.”

Mr Sadlier said many owners did not carry out proper assessments of their property’s replacement costs each year, with most just adding a “little extra to last year’s guesstimate”.

“Worse still are those who rely solely on online calculators to help them assess their insurance values,” he said, adding that online calculators failed to take into account consultants’ fees, demolition and forecast building cost inflation, allowances for site works, retaining walls, mature landscaping and additional works.

“These wildly inaccurate tools are causing major headaches for those who thought they were adequately insured.”

A number of flood affected houses across Brisbane have just been gutted and put up for sale

THE RENTAL CRISIS

Australia is in the grips of a rental crisis, with many regions recording vacancy levels below 1 per cent.

On the east coast, Sydney’s vacancy rate in September was 1.3 per cent, Brisbane was 0.7 per cent and Melbourne was 1.4 per cent.

It is even tighter in lifestyle regions that have seen significant interstate migration such as the Gold Coast and Cairns (0.5%) and the Sunshine Coast (0.7%), according to SQM Research.

“Floods will have massive implications on construction programs, add continuous strain to the supply of building materials and increase upward pressure on construction costs,” Mr Sadlier said.

“This means people will be displaced for longer periods of time and will need alternative shelter.

“A big flood would only add more demand to the rental market while also removing a swathe of supply.

“You can see how that equation will cause the currently dire rental situation to become even worse.”

Mr Sadlier said that the only thing Aussies could do was to ensure they were “financially storm ready”.

“Make sure your insurance is up to date and that it delivers comprehensive coverage,” he said.

“Most important of all is to confirm you have an updated insurance value estimate for your home that has been prepared by a qualified professional.

“This is the only way to guarantee you have adequate coverage as a safety net against the weather.”

 

Originally published as Why Australia is facing a ‘devastating insurance crisis’ this summer By Samantha Healy, The Courier Mail

Reference: https://www.weeklytimesnow.com.au/news/regional/why-australia-is-facing-a-devastating-insurance-crisis-this-summer/news-story/

Is the Lucky Country Losing It’s Mojo?

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Four Corners’ episode last week “No place to call home – the new face of homelessness in Australia” made for sombre viewing.

It followed the stories of hard-working young Australians, primarily single mothers, as they desperately try to find even the most basic accommodation for their families in regional towns.

They talk of applying for hundreds of properties, only to be in competition with dozens of other applicants, and to face the demoralizing news that they were yet again unsuccessful.

In seaside centres such as Coffs Harbour, the shortage of affordable accommodation has been exacerbated by an influx of people from Sydney and Melbourne.

Office workers previously bound to CBD locations, have discovered a new sense of freedom. As we emerge from COVID, the evolution of the work environment for some means all they need is internet access to login to their work from anywhere.

It’s easy to see why the lure of a sea-change or tree-change has been too tempting to resist, but it’s impact on the rental market has had repercussions for many.

It’s not just the WFH transition that’s caused the disequilibrium.

Australia is caught in a perfect storm of rising interest rates, escalating costs of materials, global economic uncertainty, oil price volatility and more.

 

 

 

 

The rental crisis in Australia

The rental crisis has not been caused by COVID, but the pandemic has definitely made it worse.

Already a challenging situation in 2019, the national rental vacancy rates fell to 0.9% in August 2022, according to SQM research, the lowest rate since 2006. This is well below the 3% margin which is considered to represent a healthy market balance.

The plummeting vacancy rates have been brought about by many factors:

  • Australians returning from overseas during COVID and moving back into properties (somewhat offset by people leaving our shores to return to their own homes during COVID);

 

  • Lack of housing supply and delays in new builds as construction companies grapple with rising costs of materials and labour;

 

  • Landlords turning their properties into short term rentals and removing them from the rental pool;

 

  • Changing lifestyles, with “knowledge workers” capitalizing on the ability to work from anywhere and leaving behind the hustle and density of capital city living – seeking a seachange or a treechange;

 

  • Higher construction costs and difficulties getting contractors;

 

  • Interest rates are increasing, pushing rents up to cover mortgage payments;

 

 

  • Some properties are still not repaired from the floods early in 2022, even as Australia braces for a third season of La Nina.

 

The rental crisis is not isolated to regional towns either.

Corelogic’s quarterly rental review showed the national rental index increased 0.9% in the month to June and 2.9% over the June quarter.

“Rents are 9.1% higher across capital cities and are up 10.8% in regional cities compared with June 2021. Canberra remained the country’s most expensive rental market, with the typical home renting for $690 per week, ahead of Sydney which recorded a median rental value of $643 per week, and Darwin at $565 per week.”2

While this appears to be good news for Landlords burdened with increasing mortgage payments, the disconnect between demand and supply in affordable housing is a problem that needs addressing.

 

The Laptop Line

There’s a new phrase being bandied about over the past week or so.

The Laptop Line divides those in inner cities in largely white collar jobs that are able to work from home, against the balance of people who have to show up to a place of work in order to do their jobs.

Think police, teachers, construction workers, nurses, among others.

These professions are integral to the fabric of our cities and towns.

And oftentimes they can least afford to live close to work.

This isn’t the first time this has happened, albeit for different reasons.

Towns that benefited from rising property prices during the various mining booms of the 90’s and 2000’s, also experienced the challenge of shortages of essential workers who couldn’t afford the living costs brought about by skyrocketing rents.

This isn’t just a property problem, it’s a society issue.

 

Is WFH here to stay?

The “working from home” phenomena is a hot topic in the media and on platforms such as LinkedIn.

Everyone from the CEOs of major property companies to Hamish McDonald on the Project has a view on the subject, and they’re not afraid to share it.

Whatever your perspective, it does seem set to stay in some form or another, most likely in a hybrid form of flexible working.

If the reality is that workers need to front up to their place of work 1-2 days a week as has been suggested, this may go some way to alleviate the pressure on rents in towns such as Coffs Harbour.

But it will take time to play out and it doesn’t help those looking for properties to rent right now.

 

The supply side

On the supply side the picture is not much prettier, with recent reports that lending for new homes continues to slow.

The ABS recently released the Lending to Households and Business data for August 2022, showing a 3.4% decline in the total value of housing loans, brought about largely by the economic tightening we’re currently experiencing.

“The decline in August brings the value of housing loans to its lowest level in almost two years, down by 15.4 per cent on three months earlier,” according to Tom Devitt, an economist with HIA, the Housing Industry Association.3

“The number of loans for the construction or purchase of new homes also declined by 4.5 per cent in August, to its lowest level since March 2020 – the first month of the pandemic in Australia. This is consistent with other leading indicators, such as HIA’s New Home Sales Survey, showing new home sales dropped in July and August in response to higher interest rates.”

So if property owners and developers are faced with tightening credit restrictions and hurdles to financing, or are loathe to take out building loans in the face of higher interest rates, where does this leave our housing supply pipeline?

This combined with rising costs of materials and lack of available contractors, and construction firms struggling to stay solvent, suggests the housing demand/supply equation is under even further threat if nothing changes.

 

The way forward

If the RBA’s intent in increasing interest rates is to put the brakes on an overheated property market and halt inflation, then it appears to be having an impact.

But with so many levers at play at both a micro and macro level, the fallout is being felt at all levels of the economy.

The Federal and State Governments are not unaware of the issues, with QLD State Government holding a Housing Summit in October this year and the topics being hotly debated.

We need to find solutions for affordable housing, as well as support for a struggling construction sector.

Levers such as incentives for developers to include higher ratios of affordable housing in developments and forums that place the many issues of housing and living costs front and centre of national policy are required.

Property owners and developers have a critical role to play in addressing the imbalance between supply and demand, but they cannot be expected to fix the problem in isolation.

If ever there was a time to be prudent in making decisions, it’s now.

Whether you call it luck or opportunity, Australia is still a great place to be for many, and we need to make sure it stays that way for every single one of us.

As a nation, we might have temporarily lost our mojo, but with a team effort, we can get it back.

 

MCG Quantity Surveyors are committed to playing their part in ensuring a prosperous and safe Australia for all.

We can help developers and home owners ensure they are making the best decisions when it comes to feasibilities and cost estimates, prior to embarking on projects, and assist with tax depreciation schedules to get the most out of any development or purchase.

Contact us now for an obligation free quote on 1300 795 170 or go to our website mcgqs.com.au for more information.

 

 

References

 1  “No place to call home – The new face of homelessness in Australia”  3 October 2022 <abc.net.au/4corners>

2 “Rents rise at fastest rate in 14 years across Australia” July 2022  <theguardian.com>

3  “Lending to build a new home continues to slow”  September 2022 <HIA.com.au>

The political idiocy surrounding Aussie housing

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Ask those who know me, and most would say I’m not prone to emotional outbursts. Sure, half a bottle of red and a robust debate on sports cars or the world’s greatest guitar player will bring out my strident fervour, but I know my limits.

However, there’s one issue that’s come to the fore that I cannot stomach and I think it’s high time to deliver a verdict on exactly what’s wrong and how I’d fix it.

I am talking about the political idiocy in discussions surrounding Australia’s rental crisis.

 

Who started the fire?

I’ve been collating information and expert opinions from a range of reliable sources and there’s no doubt today’s rental crisis is founded on two pillars.

 

  1. Politics

We’ve seen a comprehensive disincentivising of property investment by politicians across all jurisdictions.

There’s been an insane amount of states-based legislative change to tenancy laws and these amendments have been wholeheartedly weighted in favour of tenants.

Victoria introduced a raft of new rules in 2021 that included allowing tenants to modify the home and stricter terms around ending a tenancy. New South Wales tenancy laws in 2020 restrict rent increases to one per year and allow for minor alterations by the tenant. Then there’s Queensland which is currently undergoing its first round of legislative changes with relaxations for tenants wanting pets and making modifications to the home as well.

While much of this may sound minor, it demonstrates a gradual erosion of a landlord’s control over their valuable asset.
But even worse is that some people think legislators should go further. During a historic rent crisis, tenants’ unions and minor-party members are pushing for even more rigorous changes to disenfranchise landlords.

In Queensland, for example, the Greens want to freeze rents for two years then only allow two per cent annual increases. They are effectively removing the free market from the equation and looking to “socialise” assets owned by mum-and-dad investors. Fortunately, and for now, the Labor party in Queensland has ruled out any such change.

Mind you, the Queensland government’s recent attempt to change land tax laws shows they’re not above bad policy themselves. The amendments, which would have seen investment property in other states and territories being used as part of Queensland’s land tax assessments, were diabolical. Fortunately, because of political backlash and campaigning by investor advocates, the plan was shelved.

Yes, the vilification of investors has been relentless.

In the last two federal elections, they have been a supposed “soft target” for some politicians. It was perhaps Bill Shorten’s unrelenting attacks in 2019 that were the most divisive federally. His platform of abolishing negative gearing and capital gains tax concessions was designed to curry favour with Labor’s base. He, however, grossly underestimated the aspirations of the voting public. Landlords (and those who hope to one day be a landlord) came out in force and kicked Mr Shorten to the kerb in the “unlosable election”.

Even so, the most recent federal election also saw minor parties attack investors – constantly painting them as greedy, property-hoarding multi-millionaires. But ABS numbers disprove this fallacy. Of Australia’s 2.2 million investors, 85 per cent own two or less investment properties. Put another way, the vast majority simply want a little extra income in their retirement.

 

  1. Finance

Property investment requires its buyers to qualify for finance on reasonable terms, but that has become near impossible for many.

Findings from the Royal Commission into Banking and Finance resulted in tougher loan conditions for all borrowers, but none more so than investors.

Regulations were introduced to slow investor lending. Financiers applied a range of measures such as higher LVR thresholds and more rigorous and conservative financial assessment during the approval process.

And then there’s interest rates. Despite investors traditionally having far fewer defaults relative to owner-occupiers, banks continue to charge them higher interest rates.

Now they’re being hit with ongoing interest rate rises and increased serviceability buffers along with the rest of the public.

Buying a property and then finding the funds to hold it have become more and more challenging. It’s little wonder that investors have been fleeing the sector. Many saw the hot 2021 market as an opportunity to cash out, which has of course led to fewer rentals in the face of rising tenant demand.

So here we are. Investors have been battered, bruised and belted on all fronts. If I can put it bluntly, they’re sick of the bullshit and are walking away.

 

The fix

In my opinion there are two ways we can turn the market around and help all tenants find a home.

The first is to increase investment in government housing. Public housing accounts for around two to three percent of all rental stock at present. That’s a pittance of what’s needed.

Governments should instead be aiming to provide a minimum of 10 to 15 per cent rental housing. This would not only help secure affordable rentals for all Australians, but it’d also stimulate an array of industries across the economy from construction to general services.

The second move to end the rental crisis is simply this – stop belting investors and instead, start encouraging them. Favourable policies such as a reduced tax burden and financial incentives will incite participation.

At the very least, end all the anti-landlord rhetoric and policy implementation. All this does is encourage those with investable funds to find other ways they can grow their wealth outside of real estate.

Of course, being on the side of the investor is deemed politically unsavoury. Those in power are too afraid to say what must be said, which is that investors are a positive influence, not the big bad wolf they’re all too often painted to be.

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