Is Australia in a rent / rates spiral?

We need more rental properties. The problem is that the group that funds most of them isn’t too keen on supplying more right now.

As interest rates rise, we are seeing fewer property investors. The combination of this and rising construction costs means that fewer homes will be built, further exacerbating the shortage of rental properties and pushing up rents.

Rental growth feeds into inflation and with high inflation, rates need to rise more. What can be done to solve this rent/rates spiral?

Australian advertised rents have increased by 22 per cent over the past 12 months with some parts of the country experiencing much greater increases. They are increasing for a wide range of reasons. Population growth has started again, while at the same time we have a construction crisis limiting the amount of new development.

Holiday home purchases surged during the pandemic and we now have a lot of homes vacant in many regional areas for a large part of the year. Even areas where it wasn’t that long ago that there was a threat of oversupply of apartments are seeing fast growth in rents as students return to face-to-face learning and international migration starts up again.

With interest rates rising, the number of property investors has been falling.

The total number of new loans to investors has now fallen by 30 per cent from the peak in March 2022 and the rate of decline will continue.

Like owner-occupiers, investors are struggling to get finance and are spooked by price declines. Rental growth is continuing but is often not enough to combat increasing interest payments.

A lack of investors is also flowing through to housing development. Most new apartment developments rely on investor purchases to get enough precommitments to get the project up and running. With the double hit of construction cost rises and a drop in investors, this means that far fewer will get off the ground. This means fewer apartments available for renters and also for owner-occupiers. It will also impact the number of new houses available for renters given that investors are also active purchasers of house and land.

What is the solution? What would most quickly work would be to incentivise investors back into the market but with caveats. The second is a longer term option and that would be to diversify who provides rental housing in Australia.

Private investors supply almost all rental housing in Australia. As such any factors that influence this group such as interest rates or changes to policy can lead to increases or decreases in their activity. The quickest way to get more rental properties would be to incentivise this group through some form of additional tax incentive. The problem is that this is politically unpopular given that investors and first home buyers tend to concentrate on similar sorts of properties. An additional incentive on new properties not only would assist with this – it would increase housing supply and increase the number of rental properties.

Longer term, getting other groups to step into providing more rental housing should be a goal. Government should be providing more rental housing, with a focus on provision to vulnerable groups. Unfortunately not enough was being provided even prior to COVID-19. We are now in a situation where governments at all levels have much higher levels of debt because of the pandemic, and higher debt repayments because of higher interest rates. A sizeable increase in government supplied rental housing is unlikely to materialise.

Build to rent is another option. In the US, build to rent (or multi-family as they know it) is the largest property asset class with institutions developing, financing and owning most rental properties. In Australia it is a growth area but large companies currently own a miniscule amount of total rental stock. It is important that a focus on this continues, particularly given there is a lot of momentum amongst many developers and also significant funds that are interested in investing.

The final group that could provide more rental housing are offshore buyers. It is unlikely most of the rental stock in places like Melbourne CBD would have been built without the funds provided by offshore investors, particularly given large scale projects cannot begin without a significant level of precommitment prior to building. Since last decade, a range of additional taxes and charges have been put in place to discourage buyers from overseas. While other factors have also contributed, rolling back many of these would be a step towards getting more investment. Australia already restricts foreign buyers to buying new properties so this would also ensure more construction takes place, further increasing housing supply.

Article by: Nerida Conisbee; Ray White Group Chief economist