6 ways to tackle the roadblocks to Australia’s housing problem

A recent publication released by the LJ Hooker Group unpacked the current state of Australia’s rental market, depicting it as a landscape grappling with a “range of challenges” and, more significantly, plagued by an unhealthy imbalance between demand and supply.

“Surging rental demand, from demographic and population changes, and limited availability of new and existing properties, has seen vacancy rates fall and rents significantly increase,” the report read.

On the demand side, the report elaborated the country has undergone notable fluctuations since the start of 2020, primarily driven by two key factors: overseas migration and evolving household dynamics.

“Initially, as the pandemic took hold, there was a decline in rental demand as young singles and couples moved back home, and non-residents and international students returned to their home countries.

However, as time went on, there was a shift in tenant demand, with individuals seeking their own living spaces away from parents or flatmates,” it stated.

This trend sparked a demand for compact apartments or spacious houses featuring additional amenities such as backyards and studies – effectively addressing the requirements for isolation and remote work. As a result, it led to a decrease in household sizes.

According to the Reserve Bank of Australia (RBA) report, the decrease in average household size since early 2020 led to the formation of approximately 120,000 new households, which the network’s report noted consequently drove up demand in the rental market.

Additionally, the reopening of borders saw a surge in rental property demand, especially in inner-city apartment markets, as international students, skilled workers, and residents returned to fill work shortages.

The report cited data from the Australian Bureau of Statistics (ABS) which showed Australia’s population grew by 1.9 per cent or 496,800 people in 2022, the fastest pace since 2008.

Over 619,600 overseas arrivals were recorded during the year, significantly higher than the 232,600 departures seen during the period.

Supply-side factors have also played a significant role in shaping current rental market conditions, according to the report.

During the initial stages of the pandemic, the report highlighted economic and regulatory uncertainties that led investors to offload properties, particularly in holiday markets.

And although the subsequent market upswing aided in the recovery of some properties, it noted overall rental stock did not fully return to pre-pandemic levels.

The report pointed out that higher interest rates have also created financial cost pressures, dissuading investors from entering the market at the same pace as tenant demand, despite attractive rental yields available.

But the supply-side issues faced by the rental market are not seen to go away any time soon, as indicated by the report’s bleak outlook for new housing supply.

“The number of new dwellings being approved continues to decline and high construction costs, a shortage of skilled tradespeople, and increased financing costs have put pressure on developers’ and builders’ margins, leading to a slowdown in construction times and insolvencies,” the report stated.

And while there is a “silver lining” emerging as evidence suggests investors are starting to re-enter the market for rental properties, the report noted low sales listings (down -15 per cent compared to last year) and higher interest rates (currently at 4.1 per cent) hinder significant improvements in vacancy rates and rental growth in the short term.

This tug of war between supply and demand, with rental stock on the losing side, has led to rental prices across capital cities and regional markets to rise, according to the report, with capital cities seeing higher growth rates compared to regional areas.

Citing data from CoreLogic, the report noted rental prices have surged by 9.9 per cent in the past year, with capital cities experiencing a growth rate of 11.7 per cent compared to 5.4 per cent in regional markets.

Vacancy rates have mirrored the demand and supply dynamics, with rates peaking during the pandemic-induced lockdowns and subsequently falling.

Looking ahead, the report expects the rental market to continue experiencing strong rental price growth due to slow new home construction and solid population growth.

The report enumerated six strategies that should be enacted now to to achieve a “balanced” rental market:

1. Government funding and construction. One strategy the report recommended is governments directly financing or building homes to ensure a steady supply of housing, especially during market downturns. As an example, the report cited the Defence Housing Australia, which offers stable housing for military families.

2. Increasing availability of affordable housing. Increasing the supply of social, community and affordable housing, particularly in the less affordable inner-city areas and rapidly growing regional markets, is one way to tackle the rental crisis, according to the report.

In addition to supporting disadvantaged individuals, low-income earners and essential workers, the report noted it will contribute to the economic sustainability of these areas.

3. Aligning incentives with population growth. According to the report, planning and development incentives should be aligned with population growth, focusing on areas with high demand for labor and low rental vacancies.

The report also called for incentives to build in fast-growing regional areas, as these regions need help supplying new housing quickly due to the limited number of builders and tradespeople in these areas.

4. Encourage long-term leases. Incentivising long-term leases can provide security and stability for tenants, according to the report.

“Landlords could be encouraged to offer long-term, multi-year leases, similar to commercial-style leases, typically span 3, 5, 7, or 10 years.

Commercial leases also outline any rent increases over the term and include make-good clauses that allow tenants to change the interior while ensuring the property is returned to its original condition upon expiry. Such measures provide certainty and security for both tenants and landlords,” it stated.

5. Boost Build-to-Rent incentives. Increased incentives for large-scale builders and institutions to construct rental properties for long-term renting will increase the availability of rental accommodations and provide more options for long-term rentals.

6. Balance short-term accommodation and long-term housing. Finding a balance between short-term accommodations for tourists and permanent long-term housing is crucial, the report stated, as this ensures affordability and adequate vacancy rates for the local population, supporting both the tourism industry and the businesses that cater to tourists.