How can we improve affordability in the private rental market?

The proportion of income spent on housing has risen 3 per cent in the past decade, now sitting at 17 per cent, with much of the cost increase burden being felt by those on the lower end of the income scale, according to the new report from the Productivity Commission, In need of repair: The National Housing and Homelessness Agreement.

Renters in the lower quintile spent 43 per cent of their income on rent, a figure that decreased to 32 per cent in those in the second quintile, highlighting the rental burden being placed on many Australians.

Consequently, the increasing cost of housing and the lack of adequate social housing options have forced many citizens to the brink of, or completely into, homelessness — ratified by an increase in the individuals seeking specialist homelessness services since 2011–12.

So, this begs the question — how can we make Australian housing more affordable?

Recently, the Albanese government made $575 million available within the National Housing Infrastructure Facility to improve the nation’s social housing stock. The Productivity Commission has built on this, providing various recommendations on ways to improve Australia’s housing affordability woes.

One such recommendation was to make improvements to the Commonwealth Rental Assistance (CRA), after it was found back in January that 45.7 per cent of renters receiving CRA find themselves in “rental stress”, with this proportion likely to have ballooned out in recent months, given consecutive cash rate increases and further inflationary pressures.

The report calls for the government to prioritise a review of the CRA, which should cover “all aspects of the payment design (including minimum and maximum rates, the co-payment rate, indexation, income tapering and eligibility) with the aim of improving sufficiency, fairness and effectiveness of the payment”.

It also called for consideration to be given as to how any CRA changes would impact and interact with other social and housing policies at the state and federal levels.

Among the reformation recommendations is a uniform increase to the maximum rate of the CRA, which would be a simple, fast and effective relief delivery method, although it is important to note that this option would be costly, given that back in 2019–20, the Treasury calculated a 40 per cent increase in the maximum rate of CRA would cost $1.7 billion.  

A more feasible option would be better targeting of where CRA money ends up. In the 2019–20 financial year, 27 per cent of recipients had household income in the top three quintiles of distribution, while further analysis found that 28 per cent of CRA recipients would not experience rental stress if their payments were withdrawn.

Reviewing the CRA could result in options being considered for greater targeting of the support where it is needed most, which could include changes to eligibility, income tapering or maximum rent thresholds according to payment or household type.

Such a change would involve “trade-offs and fine judgements about need”, according to the report, which added that “recipients of lower-value allowances, like youth allowance and JobSeekers, have lower residual incomes, and experience more severe rental stress, than people receiving pensions or family tax benefits”.

“Other recipient groups, such as full pensioners, tend to receive CRA for longer periods of time, so might experience more persistent rental stress,” it said.

Furthermore, given the CRA is indexed to the consumer price index — which rose 6.1 per cent in the 12 months to June — recipients are exposed to fluctuations in rent — a factor that has seen the report call for a review of how CRA payments move with market rents, which have surged by 9.5 per cent in the same period.

The report outlined how “rent makes up only 6 per cent of the bundle of goods and services that form the consumer price index, but absorbs 36 per cent of the median low-income private renter household’s income”.

Moreover, it advised that the CRA should be expanded to offer protection for all low-income private renters, especially given that approximately 43 per cent of low-income private renters did not receive any CRA payments during the 2019–20 financial year.

The Productivity Commission does acknowledge that there is a chance, albeit slim, that an increase in the CRA would just pass on to rents; however, there is a higher risk of this occurring during a period of low vacancy rates and drying supply, which ties into the report’s second recommendation: To boost the number of homes on offer.

Australia has 411 dwellings per 1,000 people, one of the lowest rates of all OECD countries; however, this is offset by the fact that the 200,000 new dwellings, mainly detached homes, added to the housing stock per annum across the last few years places Australia has one of the highest-ranked nations for flow of new housing.

Building more homes can reduce aggregate house prices and rents by increasing the supply of rental properties, sending vacancy rates on a similar trajectory. Several Australian studies explained that increasing building approvals and housing construction culminate in decreased rents.

The report cited the relaxation of land-use regulations in Auckland in 2016, which allowed for more higher-density housing, such as apartments and terraces, and subsequently resulted in rents growing at a slower pace than the rest of New Zealand, as an example of how boosting stock through policy changes — temporary or otherwise — can positively impact rents.

It then detailed how housing supply targets commitments in major urban areas for state and territory governments could make a difference, despite concessions that such an approach would need the support of better data and indicators that measure alterations in housing stock, density, zoning, and supply of land.

Further to this, the Albanese government has announced it will establish a National Housing Supply and Affordability Council (NHSAC), which could “promote consistency in the measures and methods used by states and territories in setting and reporting progress on land supply — or go as far as setting the land supply targets itself”.

All in all, the Productivity Commission concluded that the “starting point” for the NHSAC’s efforts towards more affordable rentals would require: