Australia’s Renters

Australia has a growing generation of residents who can not only ‘not’ afford to buy, but cannot afford to rent either.  They’re the oft forgotten ‘rental sector’ lost amidst an abundance of market commentary devoted to the ‘good news’ on falling interest rates for mortgage holders, endless ‘forecasts’ of growth for potential property investors, and renovation mania which is set to hit the country once again  as we enter the year’s annual ‘ratings war’ full of obsessive real estate reality shows.

Despite reports assuring buyers that housing affordability has improved, or the persistent and poorly assessed claim that it’s cheaper to buy than rent in an increasing number of suburbs, (the methodology of which I argue against here) the percentage of people requiring rental accommodation is fast gaining pace, and for the past 5 years or so, yields have been rising at phenomenal rates – by and large outpacing both wage growth and inflation for the same period.

The insistence from various commentators that the steep rise in rental prices will push increasing numbers back into ownership fails to consider that inflated yields coupled with erosion of interest on long term deposit accounts has all but cancelled out any perceived benefit for a large proportion of ‘would be owners.’ Consequently, they often have no choice but to lodge with family or friends as they transition through the various stages of job changes and property moves. 

Currently, roughly 30 per cent of Australia’s housing market is made up of renters.  The 2011 census data indicated median rises in rental prices rose sharply over the five year interim, with Western Australia tipping the scales with an increase of 76 per cent over the corresponding period.

As if in step with international markets which mirror our own in terms of political ‘speak’ insisting ‘people have a right to land at affordable prices’, - (albeit in modern times, ‘later rather than sooner’) - owner occupiers have been slowly diminishing and the proportion of renters ‘priced out’ all together, increasing.

Australia’s owner occupancy rate which once sat at 71.4 per cent in the mid to late 1990s, now resides at 67 per cent and forms part of a slow decline of which families with children in particular seem to be suffering.  - The decrease of ownership for this demographic has fallen from 79.5 per cent (2006) to 77.2 per cent in 2011 - and considering the low activity in the market of late, it’s fair to suggest the downward trend is set to continued.

Other reports presented late last year suggest that had ownership percentages stayed at the same level as that recorded in the 2006 census, we’d have ‘welcomed’  an additional 34,000 into the property market.  As it is, despite the 6.1 per cent ‘peak to trough’ fall in the national median house price, and flat prices in most capital city markets throughout 2012, sales turnover over the past two years has been woefully low –back at levels not seen since the late 1990s.

It’s easy to ‘palm off’ the figures as a result of low consumer confidence, however as the latest Fitch ratings report  on residential mortgages pointed out, – Australia still suffers the “least affordable housing” worldwide – and it’s nothing to be proud of. 

As mentioned above, the trend is not localized. In the UK the owner occupancy rate is at its lowest level  since 1988 with 64.7 per cent of the population now classified as ‘owner occupiers’ and the proportion of people renting, rising from 31 – 36 per cent over the preceding ten years.  This is despite a recent “British Social Studies Survey” which indicates 86 per cent of tenants (social included) still foster a strong desire to “own their own home.”

In light of their financial woes the USA is of course no different - their owner occupancy rate is at a 15 year low with roughly 65 per cent of the population now classified as ‘owner occupiers’ and a rental sector which is straining under the pressure of inflated yields and increased demand in capital city locations.

In fact across all property markets which have historically boasted high owner occupancy rates, the rise in the number of ‘home less’ people is strengthening as the vicious circle of trying to save for a deposit in a fiscal environment whilst servicing high rental prices, keeps residents well and truly ‘stuck’ – often in accommodation which is not adequately suited to their family’s needs.

A comment - (one of many) - from a ‘would be’ home buyer, on “Australian’s for Affordable Housing’s” Facebook site last week summed it up perfectly,

“Well I can't afford to rent let alone buy (and the) stress ..is literally effecting my health”

A closer look at exactly what it costs to rent a modest apartment within commutable proximity to our capital cities is truly eye opening for anyone who may have been out of touch with the market of late.

 In the most recent quarterly bulletin wrapping up the year for 2012, RPData noted that Perth in particular is feeling the strain with an increase in yields of 12.8 per cent for houses and 10.6 per cent for units with vacancy rates as low as 1.6 per cent. According to APM this is an increase of $70 per week over the 12 month period leading Premier Colin Barnett singling rental prices as the “biggest cost-of-living pressure facing Wester Australians.”

As was noted in another report, Darwin currently has only two rental properties listed on realestate.com.au for under $300 per week  - one of which is a rusty old corrugated iron ‘shack’ which would look more at home in a ‘shanty town.’  Whilst the median rent in Darwin is $600 per week.

Students in Queensland have described the market under $300 ‘war like’ and as for Melbourne and Sydney, well it all comes down to the standard of accommodation you want to call ‘home.’

In Melbourne, if you’re half way fussy – perhaps requiring good proximity to transport, a modest balcony, or internal floor space over 40 sqm, you’ll be hard pushed to get a one bedroom apartment in ‘original’ un-renovated condition under a minimum of $350 per week.  In Sydney, the equivalent will cost between $450 and $500 per week – which is hefty chunk for any average wage earner.

To give some idea of the condition of apartments currently for rent at the above prices – this is an interior snapshot of the kitchen in one such apartment I inspected last week in an inner suburb of Melbourne. I think it paints the picture perfectly.

Students, singles and childless couples can often make do with less space to compensate for the luxury of being close to the city or walkable distance to both transport and shops.  However single mothers, low wage families, retirees or disabled tenants, understandably require something a little more substantial than a one bedroom flat to adequately fulfil their basic needs.

As such, they’d be hard pushed to find anything suitable for less than $500 per week unless they move to the outskirts of the capital city.  And due to poor public transport facilities in many fringe locations, such a move simply isn’t feasible for a large majority of renters – albeit, many are forced in that direction. 

Is it any wonder, reports of ‘crowded houses’ – with three or more families sharing accommodation, rose nationally by 64 per cent to 48,499, in the last census. Furthermore, other data from the ABS shows from 2009-10, 42% of renter households received some form of housing assistance, once again emphasising the growing crisis in this sector of our market place.

Pressure on the rental market is unlikely to ease in the near to far future.  The ABS estimates almost two-thirds of ‘new residents from overseas’ are long term property renters  - this is compared to half new residents from ‘within Australia’ who now class themselves in the same bracket  - which is a robust figure in itself.

Economic conditions such as wage growth, un-employment, consumer confidence and frequent changes of work placements – all reduce the likelihood of a strong owner occupier market over the next decade.  Current policy is built around the general assumption that renting is a ‘step’ on the road to ownership – however  it’s fair to suggest, unless the trend takes an about turn,  tomorrow’s generation will hold a growing percentage of residents for which renting is ‘for life’ and as such, we need to consider their welfare. 

No one should be fooled into thinking private rental accommodation is affordable accommodation; residential investors are looking for strong yields and solid returns.  In a heated market, vendors will understandably go for as much rent as they can achieve (regardless of tax benefits and lower interest rates, which are rarely passed onto the tenant.)

The NRAS (National Rental Affordability Scheme) which was designed to go some way in bridging the ‘affordability gap’ for low income workers sitting on the rental ladder is also flawed in its design – a subject I’ll expand upon at a later date.  When the scheme was first initiated in 2010, the AHURI analysed the project to assess the overall impact in easing affordability. The findings revealed only 40 per cent of applicants using the accommodation had fallen below the 30 per cent ‘housing stress benchmark.  

In the meantime, it’s vital we start to steer policy towards the creation of a fairer partnership between owner and renter.  This would include longer terms of tenancy, protection from exorbitant rent rises, enforcement of basic standards of accommodation (in both the private and public sector) throughout Australia, and a greater partnership between tenant and owner -  which could even envisage the tenant taking on more responsibility for the basic maintenance of their ‘home’ in return for a secure rental ‘plan’ ensuring a longer term of permanent tenancy (5-10 years) for which rent does not outpace the growth of inflation.  Other models of assistance, including Housing Co-operatives, should also be assessed.

The benefit an investor can gain from a happy tenant should not be underestimated. Property – even when maintained through an experienced property manager – is not a ‘hands off’ experience.  Unlike a share certificate you can file away and forget about – the value of any residential property (whether letting or selling) derives from its lasting appeal as a ‘home.’  Ensuring there’s enough money left over from the initial acquisition for ongoing maintenance is vital - and a long term ‘happy’ tenant should never be undervalued.  

There is much that needs to be done to assist the ‘ownership’ of affordable accommodation; however creating a stable market terrain for tenants is equally important and needs an overhaul of current policy if we’re to do so.

Without it, the number of people seeking ‘government assisted’ accommodation will escalate to greater proportions, and the untapped potential of a growing number of residents struggling to make ends meet, will hamper advancement of the overall economy.

Catherine Cashmore