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A typical Sydney renter currently living in a shared flat in the eastern suburbs of Sydney with two housemates has seen the sharp end of rent rises. She had planned to stay in the CBD, but after seeing her rent climb by 85% in only two years, she has made the difficult decision to go elsewhere. The long-term renter is feeling the effects of a worsening rental crisis that has stretched from major cities to smaller towns. A whole generation of young people are being affected, and it’s producing problems for the federal government and raising prices. It may last for a long time say the experts, and this particular renter is giving up on her Kingsford apartment with the most recent rise in rent too much for her to bear.

12 Month Rent Rises & Affordability

Core Logic reports that over the past year, weekly unit rents in Sydney have increased by 23.6%, reaching an average of $680. Rents tend to increase as one approaches the center of a city. A three-bedroom apartment in Kingsford was $620 two years ago. In December of last year, that jumped to $880 per week. It will be $1150 the next month. “The annual percentage increase in rent is insane,” adds the previous tenant. “I think we’ve come out of one extreme – where rent was slightly cheaper than what you’d expect during the pandemic – to now being a lot more expensive than what you’d expect.”

As the government sought to ease the migration backlog that had accumulated during the COVID-19 years, rents skyrocketed. In addition to the demand increase from smaller homes created during the epidemic, the number of persons entering the nation surged dramatically. The one-third of the population that rents, often on six-month or year-to-year contracts, has heard enough of horror stories as housing shortages have persisted for years.

Advocacy organization National Shelter and urban planner SGS Economics and Planning created an affordability index showing that only Melbourne and the ACT have rents acceptable for average income households with vacancy rates near to record lows. The only state where regional living has become less expensive is Tasmania.

The cost of renting in Australia continues to rise with tenants hit in the past year by massive rent rises far outpacing wage growth. “With vacancy rates so incredibly low, landlords have been able to pass on interest rate rises to tenants – and the pressure is only set to increase following last week’s rate rise” one market participant states.

RBA Inflation Targets

The attempts of the Reserve Bank to rein down inflation are being hampered by the rental problem. The cost of services increased by 5.8 percent annually, with rent being a major contributor. Excluding highly speculative components, the annual rate of inflation for market services was 6.2%. The governor of the Reserve Bank of Australia, Michele Bullock, expressed concern last month that rental inflation might reach 10% within months.

According to a former employee at the Immigration Department, net migration to Australia in the 12 months to September is expected to hit over 500,000, with the bulk being foreign students. This would be above Treasury’s expectation for net overseas migration in the year to June of 400,000, and it would reduce the likelihood of the predicted reduction to 315,000 by next June 2024.

Household Size Changes & Short-Term Rentals

Other reasons, such as the trend toward fewer households, which has resulted in a structural shortage of 120,000 dwellings, are also putting pressure on the rental market, he says. As a result of the pandemic, the average number of persons living in a home fell to a new low of just under 2.5. Housing for international students is in high demand but is being contested by professionals.

This could relieve some pressure, at least. As more tenants explore moving into share houses, the trend of household sizes has begun to grow again. The growth of short-term rents of 10% over the past four years has reduced the availability of apartments that was in high demand among foreign students.

Short-term rentals present a significant financial opportunity for landlords. What they can charge on a nightly basis is so much greater than what they could charge for a year-long lease. Factors such as population size are also relevant. According to RBA statistics, a rising proportion of Australia’s aging population consists of “empty nesters” who remain in the huge homes where they reared their family.

Construction Constraints & Building Costs

According to economists, Australia has been sluggish to speed up construction despite the rising demand for new homes because of affordability concerns, lengthy planning approvals, and pushback from NIMBY areas. The June quarter saw a 12 percentage point quarterly fall in the number of residential projects beginning, bringing the annualized rate down to 163,000.

Rising building and land prices have made new homes unaffordable for middle-class purchasers or at the very least much less affordable. As a result, developers are hesitant to put money down for a new build until that affordability improves. Wage growth of 4% in the year ending September 30 is positive and may help alleviate some of the stress. Australians have been able to pay the country’s relatively high cost of living thanks in large part to the robust labour market. Rent hikes are additionally outpacing income increases and that many supplementary employment arise out of need rather than want.

Taking up a second job to make ends meet is hardly a prescription for happiness. A recent survey commissioned by Great Southern Bank revealed that just 29 per cent of long-term renters are content with their present housing situation and 70 per cent of individuals feel that owning a property is vital to their overall satisfaction.

Multiple Market Factors Exert Pressure on Renters.

The federal government is being urged to provide assistance, with certain economists arguing that increasing criteria for overseas students is one of the few levers it may use to slow net migration. Restricting post-study work visas is another approach.

State governments might follow Victoria’s lead and impose 7.5% taxes on all vacation rentals across the country. The states of New South Wales and Queensland are considering following suit. When it comes to planning, more and more states are designating residential projects as state important so that builders may sidestep NIMBY objections. However, they can only do so much to improve the construction industry’s dwindling wage rates and shortage of skilled workers.

Industry insiders think that governments can help by doing more to train and relocate construction workers but acknowledges there are no simple solution. Their comments agree and maintains that these shifts may occur only over time. Meanwhile, rents will keep going up for the next year – at least. Markets predict that the current high level of rent inflation will last for another two years, while CBRE predicts that apartment rents will continue to grow for another five years.

Future Outlook

Unfortunately, there is no quick fix. Market experts argue that the housing market moves at a snail’s pace. Seeing this future, the ex-Kingsford renter is relocating to Bexley, in southern Sydney. Her travel time will increase by 50%. Her Kingsford roommates haven’t decided if they’ll be staying in the apartment. “Since there are so many people trying to find rental housing and vacancy rates are so low, even with rent increases, you feel extra pressure to stay put,” she explains.

For now with no large scale reforms, the natural market movements will likely continue to support rental prices, which while a burden for renters, can be seen as an opportunity for investors.

Sources

AFR, 2023 – Here’s why rents are likely to stay high – https://www.afr.com/property/residential/here-s-why-rents-are-likely-to-stay-high-20231115-p5ek4s

Core Logic, 2023,- More than 40% of Australian house and unit markets record double-digit rent increase  https://www.corelogic.com.au/news-research/news/2023/more-than-40-of-australian-house-and-unit-markets-record-double-digit-rent-increase