3 ways to ease the rental crisis
The article is owned and published by Real Estate Business and Smart Property Investment.
With the country deeply plunged in a rental crisis, an expert unpacks the factors that led to this rabbit hole while offering three ways to get out of it.
Colin Lee, the founder and chief executive at Inspire Realty and a member of the Property Investment Professionals of Australia (PIPA), said that the spiralling rental market conditions are brought about by the anemic supply in the market being unable to keep up with a surge in demand.
“It seems, for the first time in decades, demand for rental accommodation is severely outstripping supply,” he commented.
The expert pointed out that imbalance between supply and demand has brought on grim consequences for Aussies who are scrambling to get a roof over their heads.
“[In] some jurisdictions, rental listings are receiving unprecedented numbers of tenant applications, with those missing out being forced into temporary accommodation such as camping, couch surfing, hotel rooms and even vehicles,” Mr Lee stated.
According to Mr Lee, getting to this crisis point took years in the making.
Citing the August data from SQM Research, he highlighted that vacancy rates across capital markets are now generally running at below 1 per cent — figures which he explained indicate an “extraordinarily” tight rental market”.
“For those who don’t know, a balanced rental market has a vacancy rate somewhere between 2 and 3 per cent. At greater than 3 per cent, the supply of listings exceeds tenant demand, so rents tend to stagnate and/or fall. Below 2 per cent and demand is well above supply, so rents rise,” Mr Lee stated.
He pointed towards the increasing disincentivisation of real estate investing that has deterred people from becoming landlords and, ultimately, causing supply to dwindle.
This decline in supply coincided with an observed increase in demand for accommodation, which Mr Lee said brewed the perfect storm for tight rental conditions.
He further expects this misalignment in supply and demand to only increase, as international borders reopen this year.
The expert also attributed the supply shortage to the “severe tightening” around lending to property investors in the last seven years.
According to Mr Lee, one pivotal moment that led to increased regulatory oversight was the royal commission’s investigation into the misconduct in the nation’s financial services industry between 2017 and 2019, which resulted in significant reforms in the banking sector.
The final recommendations in the watchdog’s report also had a ripple effect on the property sector. “[It] prompted the Australian Prudential Regulation Authority (APRA) to direct banks to reduce the growth of their investor loan book/ financiers responded by increasing loan buffers, raising loan-to-value ratios and applying higher interest rates on investor loans. This has made borrowing to invest more difficult,” Mr Lee explained.
The expert argued that the move to make securing a mortgage for real estate investors more difficult compared to owner-occupiers was ironic when viewed from a financial standpoint.
“Investors are a lower-risk option than home owners when it comes to loan defaults. You see, investors are more likely to sell down an asset and self-manage their way through periods of financial difficulty,” Mr Lee stated.
Next, he slammed the prevailing “anti-investor” rhetoric and regulation in the political sphere.
“We’ve already been entrenched in a regime that’s seen higher council rates, stamp duty, CGT and other charges for investors compared to owner-occupiers,” he said.
He argued that the extra costs being shouldered by investors are barely offset by negative gearing advantages, despite what anti-investor groups might be stating.
Another challenge that property investors face is renters’ advocacy groups, who believe rental prices have been increasing at an exponential rate.
However, Mr Lee counter-argued that the evidence “proves otherwise”. “If you look at the numbers, increases since 2020 encompass a bounce back from the start of the pandemic when rents were frozen and evictions outlawed,” he said.
Ironically, it was during this time landlords were asked to step up and “take one for the team”, which many did without complaint, the expert stated.
He cited data from a recent study that showed that over the past 10 years, rent increases have actually run at half the rate of inflation.
The joint research by investors group Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA) and released at the end of August, analysing capital cities and using the Australian Bureau of Statistics consumer price index from June 2012 to June 2022, found that rents increased by just 11 per cent nationally over the decade, but inflation rose by 25.6 per cent over the same period.
With this, Mr Lee said that the recent increases in rents are “just a catch-up”, as rental returns are not enough for landlords to keep up with the rising costs.
He also called out states that are rolling out legislations geared towards renters over landlords, which are causing investor stress.
“Changes allowing tenants to have pets as a right, alter their homes and even moves to restrict ending tenancies have seen landlords progressively lose power in the control of their valuable asset. It’s driving them away from property and toward other investment vehicles,” he commented.
He said that while some steps have been undertaken to improve the dismal sentiment among investors, such as the scrapping of the controversial Queensland land tax law, there is more work to be done to improve the rental situation.
Here are three steps he offered that will help to reverse the rental trend and help deliver more homes to renters.
1. Putting an end to the anti-investor rhetorics
Mr Lee first called on putting a halt to “demonising investors”, stating that “the average Australian investor is likely to be a middle-income earning mum-and-dad landlord who owns one investment property and is simply trying to save for a better retirement”.
“They don’t want to collect a pension and be a burden on the taxpayer. They are everyday people with realistic long-term goals,” he stated.
Mr Lee particularly called on those with political power to stop painting investors “in a bad light”.
“This political conduct is turning away average Aussies from investing, and it’s damaging the supply of rental,” the expert said.
2. Stop disincentive investors financially
Mr Lee said that with investors already feeling heavy hip-pocket pain from additional taxes and costs associated with holding an investment property, their burden must be eased — not added unto.
“As painful as those costs are, most investors bought their assets knowing the rules, and choosing to play by them for the long game. If governments would simply stop shifting the goalposts by looking for ways to get more revenue from investors, that would be a positive step,” he said.
He said that instead of looking at investors as people looking to take advantage of others’ demise, governing bodies should look at property investment as a win-win situation.
“Yes, investors are looking to grow their wealth, but they’re doing that by providing housing for people who can’t or won’t buy their own home,” he stated.
3. Increased collaboration/engagement with investor groups
Lastly, he called on politicians to boost their engagement with everyday-investor advocates to help draft plans going forward.
“There’s a wealth of information we can provide to all tiers of government, yet precious few seek our counsel. By bringing investors on board to help chart the path, we can find a way to beat this crisis to everyone’s benefit,” he concluded.
