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Why is Australia Suffering From a Rental Shortage?

In a nicely adjusted world, you’d think that the number of properties available for rent would be aligned with population growth – ie. the more people, the more homes to house them in. If only.

The sad reality is that, while the Australian population has increased since 2021, rental stock has decreased. In 2022 the number of rental properties dropped by more than 20,000 In Perth.

Part of the problem lies in the government selling off tired social housing stock, and not replacing it with new properties fast enough. To some extent, this is due to huge increases in building costs. However, the bigger issue is that the Australian rental system is hugely dependent on mum and dad investors – and over the years successive government decisions reduced their desire to play Monopoly.

The seed of the current rental shortage was planted in the GFC, when the Federal government tightened lending criteria to shore up banks and prevent a repeat of the crisis.  One of the side effects of the tightening lending criteria is that investors simply don’t qualify to borrow as much as they did in the past, which meant fewer investment properties have been purchased in the last 10 years.

Around the GFC, State and Federal governments introduced increased stamp duty surcharges and Foreign Investment Review Board Fees for foreign investors looking to purchase properties in Australia.  The increased fees saw these potential buyers leave Australia and purchase in other markets (eg London) where their money was treated better. These buyers were a regular source of rental properties.

This was followed on by a further tightening of lending standards in 2019 when investors were forced to switch their mortgages from interest only to principal and interest.  This saw a lot of investors who couldn’t afford the increased repayments simply sell up.  These rentals were not replaced.

Along came the pandemic, and a surge of industry commentators saying property prices across Australia were going to fall by 30%.  Some investors became scared and sold out to protect their position.

Then came State Governments introducing temporary legislation which further diminished landlords’ rights through things like eviction moratoriums and the inability to access their own property. This saw more landlords sell down in response.

Successive State governments across Australia introduced more pro-tenant legislation which diminished landlord rights e.g. VCAT, which again resulted in some investors getting out of the game.

And this brings us to the present situation, where, despite increasing rental prices, many investors are no longer able to afford to hold their investment properties due to the rising interest rates and falling equity. Over the next six months, even more investors are going to sell out, meaning stock levels will diminish even further and rent prices will continue to rise. It’s going to get worse before it gets better.

The situation is particularly dire on the east coast. When compared with current interest rates, low rental yields in Sydney and Melbourne along with falling housing prices are going to keep investors out of these markets until such time as they are confident that the market has bottomed and interest rates have hit their peak.

We also have strong levels of post-COVID immigration underway across Australia. This year the WA Government alone is looking for 36,000 police, nurses, doctors, prison guards and other public servants. In Perth, we currently have 5,600 houses for sale and 1700 properties for rent.  This doesn’t bode well for the future. It is likely to be years before the current crisis is over.

What’s the solution?

Lowering interest rates and rising rental yields are the key to getting investors back into the market to purchase additional rental stock, which can balance supply and demand.

In the meantime, there are things that State and Federal governments can do to encourage investors to come back into the market to increase supply.

Federal actions

  • Reinstate removed taxation benefits around travel and depreciation.
  • Remove Foreign Investment Review Board fees. These fees are preventing foreign investment and foreign-funded construction projects into Australian property, which is reducing the amount of rental stock. This investment money is simply going elsewhere in the world and benefiting other countries. Money goes where it is treated best.
  • Consider temporarily lowering immigration intakes so that the housing industry has a chance to catch up to demand.
  • Increase the first home buyer equity scheme. Turn tenants into homeowners, thereby reducing the number of rental properties required.
  • Review serviceability criteria for investors back to pre-GFC regulations.  Each bank has its own policies, but it is common for banks to shade investor income by things such as:
      • Applying a discount to current rents being received.
      • Ignoring or discounting regular over time.
      • Ignoring or discounting regular pay bonuses.
      • Capping rental income at 6% of bank valuation, despite long-term leases being in place at a higher income.
      • Applying a discount to rent based on the postal code of the property.
  • Allow Super funds to re-draw debt against existing properties so that they can purchase additional investment properties.
  • Review the 3% buffer on lending rates. We are near the top of the rate cycle.  Buyers are being assessed as if their rate was 9% +.  7.5 -8.0% is more appropriate.
  • Reconsider restrictions on home purchases for some visa classes. This is keeping potential buyers as tenants restricting stock for rent.

WA State actions

  • Remove land tax. This is the single biggest barrier to corporations entering the housing market. 82% of properties are owned by mums and dads with a single investment property. Adding another stream of investors will help increase supply.
  • Halt the proposed medium-density codes. They will reduce infill and add to construction costs as well as see more city sprawl.
  • Do not introduce the planned amendments to the Residential Tenancies Act. If implemented, this is going to see landlords sell down properties (REIWA noted in excess of 50% of investors would consider selling) and reduce the number of investors interested in investing in WA. This would be a suicidal move by the government.
  • Remove the 7% stamp duty surcharge on foreign investors. But continue to restrict them from purchasing new homes. This tax combined with the FIRB fee is seeing international investors put their money elsewhere.  It has failed to raise the initial forecast income and has reduced the number of new dwellings being built.
  • Have private certification for the planning of units of 4 or less. This would speed up the process and remove situations where councillors vote against advice from their own town planners.
  • Undertake a royal commission into the building industry. It is no secret that the WA building industry is a mess and needs a root and branch review to weed out bad actors, improve industry behaviour and reduce the number of builders going bankrupt.
  • To deliver new housing, developers need to make a profit. State and local governments have been treating developers as a cash bag to be tapped into on every occasion.  They need to stop treating developers as a taxation source with ongoing levies, eg open space contributions, Subdivision fees, NBN fees, Planning fees, parking fees, Western Power and water corporation fees and the proposed school construction levy for 5 or more lots.  The $80M fund is a good step in this direction.  But what happens when it runs out?
  • Build more Homes West properties. Large numbers of Homes West properties were sold off when there was an oversupply of rentals. These have not been replaced.  Due to the costs involved (particularly with a government build), they are failing to deliver much-needed social housing stock.
  • Consider a partnership model between landlords and Homes West. Whereby the Government guarantees the tenant, property condition and pays a subsidy to the landlord. Given a median house price of $540,000 in WA, in the short and medium term, this would be more cost-effective than building new homes.
  • Push councils to meet Directions 2031 infill targets. Most councils are well behind the target.
  • Speed up re-zoning. Eg the Lakes District and DA6 are woefully behind being gazetted. Re-zoning maps for Bull Creek still have not been released, despite a plan being drafted 4 years ago.
  • Review stamp duty thresholds. The last time rates were reviewed was in 2005 when the median house price was $308,000 ( $9,139 duty) versus today when it is $540,000 ($19,665 duty).  That extra $10,000 is another $50,000 in the purchase price at an 80% lend.
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