Dissecting Aussies’ housing market: Are high rents due to low supply?

Rents have been accelerating at lightning speeds as landlords pass on their rate hikes, driving tenants into financial distress. Since the beginning of the pandemic, asking rents have risen by nearly 24% for houses and 12% for units. In June alone, Aussies’ capital city rents increased by 3%, and dwelling vacancy rates fell to 1.2%. Since July 2021, dwelling rents have risen 9.1% in capital cities. Are high rents driven by a shortfall in the supply of rental properties?

Rents may be a more accurate measure of housing supply and demand as their price only captures the cost of living in a property. More competition means higher prices. This explains the growth gap between rents and house prices. While the Residential Property Price Index climbed by 30% in the decade following the GFC, rents only increased by 10% on average.

How do prices affect the housing supply and demand?

When considering the supply and demand of housing, house prices were the most reliable indicator. If their prices rose, demand outstripped the availability of homes for purchase, driving greater competition. Lower supply in the asset market overheats the rental market as fewer Australians purchasing investment properties means fewer properties available for rent.

Property is both a place to live and an asset to invest in. Their value does not just reflect the difficulty in acquiring one because of the tight supply. Unfortunately, rental prices are largely ignored in the analysis of supply and demand. This reveals an acute shortfall of supply.

According to CoreLogic, rental listings decreased by 34% in June against the Aussie long-term average for this period. This places upward pressure on rents, squeezing renters amidst our current cost of living crunch. A lack of social housing is also partly to blame. Australia has a shortfall of 524,000 social housing dwellings, which is set to balloon to 671,000 by 2032.

Why are the governments to blame for the crisis?

Govts diverting money away from social housing and affordable housing initiatives has accelerated our property crisis. Another side to the social housing shortfall is that the private sector controls almost all rents. This creates an inherent profit motive, potentially leading rental price increases to exceed the costs of mortgages or upkeep of the property.

The decreased supply has unfortunately been met with increased demand as the average household size decreases, and more people begin looking for properties. This drives greater competition as rentals become a scarce resource and the market overheats. Decreasing vacancy rates contribute to this competition problem. Vacancy rates in Sydney, Brisbane, and Perth are at record lows, while Melbourne is only 0.2 percentage points from its historic low.

As a result, rental stock is on the market for less time, forcing prospective renters to act decisively and make offers above the listed price to secure the desired property.

The problem has become acute in the last few years. For example, in 2020, median advertised house rents were at a record high in 51% of suburbs. In 2022, 85% of suburbs had house rents at record highs, while 65% of suburbs had unit rents at record highs. Rents are a critical indicator of future prices as they set long-term price trends for renters across the market, factoring in any increases to servicing costs or rental value landlords expect.

The balance of pricing between regions and the capital cities has also shifted. As thousands of Aussies embraced the ‘working-from-home’ model and flocked to regional areas during the pandemic, rents for houses and units surged. The pace was so frenetic that in NSW and Victoria, regional house rents overtook city unit rents for the first time. In Queensland, regional asking rents are higher than Brisbane city rents, trends not seen for over a decade.

Roaring migration from other states into Queensland during the pandemic is the key driver for the price increase. The affordable lifestyle and freedom from lockdowns created phenomenal demand unlike we’ve ever seen before. The race for space and an improved lifestyle created a seismic social and lifestyle shift. Compelled out of cities by lockdowns, commuter towns and scenic regional areas became a highly attractive option.

Regional areas were largely unequipped for this shift. Most properties are owner-occupied, so the supply of rentals is very tight. They often lack the housing infrastructure to support a large-scale influx of people. Many homes are owner-occupied, and available rentals scarce.

The volume of demand mixed with constrained supply is a nightmare for renters, sending prices skyrocketing. While development has begun to pick up in these areas to fill in gaps in rental and investment capacity, it won’t provide price relief for renters for some time.

Ulrika Lobo is the Director of Sparrow Loans, a private property lender in Australia. Ulrika has nearly a decade of experience in finance, underpinned by an MBA and a Master of Finance. She was also recognised as Western Sydney Women’s Entrepreneur of the Year in 2021 and awarded ‘Finalist’ for Director of the Year in Women in Finance’s 2020 and 2021 awards.

Ulrika Lobo, Director of Sparrow Loans