When will the rental crisis end?

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Australia is in the midst of a rental crisis. 

Audio Clip: [00:00:10] Sydney's rental market has gone from bad to worse, with prices continuing to soar. 

Audio Clip: [00:00:15] There is a real and genuine rental crisis out there. This is not just talk. 

Sascha: [00:00:20] And this involves a prolonged period of very low rental vacancy rates combined with rising rent levels earlier in January. Call Logic published data that said that the national vacancy rate had almost halved in the past 12 months and was down to 1.2% from 2.1% previously. And since the start of the upswing in September 2020, Australian rent values have lifted 22.2%, marking the largest rental upswing on record. Based on the ecologic Hedonic Rental Index back series. So for those of you who want numbers, this means the median weekly rent valuation across Australian dwellings rose from $430 per week to 519. It's Monday, the 30th of January. And today I want to know what led us to this so-called rental crisis. And more importantly, what's the solution? To do this today, I'm joined by Thomas, who is one half of Comedian vs Economist. I'm not supposed to have favourite podcasts here at Equity Mates, but it certainly is a weekly highlight releasing on Wednesday and they are back from their summer break this week. Thomas is an expert in this particular field and a working economist and he's going to talk me through this subject. 

Audio Clip: [00:01:41] New figures have exposed the rental crisis gripping our country, with experts warning there is no end in sight. 

Sascha: [00:01:47] I did read some papers, physical papers over the holidays and every single one of them reported on this. And it seems to be a constant topic on new sites and other podcasts I listen to. So I'm going to give you a couple of the stats that I pulled. Thomas Call Logic reported in January that the national vacancy rate has halved in capital cities in the past 12 months, and it's now down to 1.2% nationally. National rents, they've also risen by 10% in the past 12 months alone. The Sydney Morning Herald is saying that one in five renters are offering more rent than the advertised price in Victoria, although that practice is outlawed in several other states. I mean, I could go on, I've got a longer list here, but Thomas, as a renter, my lease expires in May. Those stats are giving me a bit of anxiety. I'm seeing this described as a crisis which feels accurate. But is that the official terminology? Can you walk us back and exactly define what's going on here?

Thomas: [00:02:47] Yeah, crisis probably isn't. There's not an official term of that that would sort of require some kind of crisis response. So the politicians are probably very careful not to label it an official crisis, but certainly it is the case that the rental market is going bananas to name the official term for it. Yeah, rents are through the roof, the vacancy rates through the floor. It's the tightest rental market styles. Rental market, I think. I think you could say we've ever seen one in Australia. It is really remarkable. The really interesting thing about it is that when COVID first hit and the international borders closed, the general consensus was that that was going to put downward pressure on rents, that you'd have less people coming into the country that would free up some of the housing stock. It would become a renter's market, and that should put downward pressure on rents. What happened, though, was the complete opposite, and that was really interesting given that happened before the borders reopened. And we got to look at this with the census data last year. And what we found in 2021 is basically that people just spread out. So used to be the average household size was 2.6 people. We all just spread out more. We took up more rooms and the average household size fell to 2.5 people. That doesn't sound like a huge number or a huge drop, but it's enough to create demand for an extra 200,000 homes. And that's you think about 200,000 is quite a lot. That's, you know, in a good year. In a great year, that's as many detached houses and units that we produce in a year. So we just had this instantly an extra year of demand just put into the market and the market was already tired. But then it went to it went to crazy tight. 

Sascha: [00:04:28] You said that 200,000 houses is basically the max that we can create. Is that because of limitations on an actual supply like wood and concrete and builders is or can we kind of increase that that ability to make more houses?

Thomas: [00:04:44] I mean, theoretically there's no real limit on it. You could sort of just, you know, pump out a million houses if you wanted to. There's a lot of constraints on it. And one of the big mismatches you've got with the housing market is you have supply largely determined at the current. So on the state level. So state opens up the land and councils approve it for housing and that sort of where the flow of housing comes from. Housing itself is then held by private developers and that's thus overwhelmingly, almost entirely. That's where new housing stock comes from. There's a lot of accusations that they will hold back on land supply to keep prices inflated, and there's some evidence of that. But then you have some of the demand factors like interest rates and net overseas immigration that they're set at the federal level. And so it's really the housing balance. The housing market is in no one's hands and everyone cries crocodile tears about it. But there's nothing that anyone really able to do about it because it sort of requires a crisis level kind of coordination. But no one wants to call it a crisis. 

Sascha: [00:05:49] Well, we'll get into solutions in a second. But you did name the I word, which is interest rates. What effects and what role do interest rates have on rental prices? Because obviously that is the other dominating subject in the news at the moment, right?

Thomas: [00:06:05] Yeah, this is interesting. This one, they have no impact on rents. There's no connection between interest rates and rents. Wow. Rent and house prices are connected in the sense that when rents go up, that pushes up house prices because you can think of rents as the return on your asset and in the sort of financial sense, as returns of an asset go up, the price of an asset goes up. So that makes it like if you go if you're getting more rent for a property, its investors are willing to pay more for it because it's getting a bigger return. So increases in rents lead to increase in prices, but it doesn't flow the other way if prices go up, that has no impact on the rental market. The rental market prices are set by a supply and demand, supply of properties, supply of rental properties in the market and demand for those rental properties. And so interest rates and inflation don't actually have anything to do with it. 

Sascha: [00:06:51] Because I see those two things in the same sentence a lot. Is that because in Australia we do have a lot of people who invest in property as an investment and therefore expect the rental yields to cover their mortgages. 

Thomas: [00:07:09] They might have that expectation. I mean, I think what you're seeing is a justification for the rental increases that they're seeing, that investors are seeing that they can get away with increasing rents, they can get away with jacking up the prices. And so they're just doing that and then looking for a cover and saying, well, inflation, but there's no inflation in the landlords costs other than the prices of, you know, mortgage payments going up. But that's not really a justification for increasing rents. It's really a demanding story. And, you know, can point, point, everyone, everyone's pointing the finger at inflation. This is kind of a bit like corporate price gouging going on in the rental market. 

Sascha: [00:07:44] In a moment, Thomas and I talk about how long this rental crisis is going to last. We'll be back. 

Audio Clip: [00:07:59] But what is happening is that landlords might be testing the market for the first time in a little while. They might be seeing how much they can get. And they're finding that the desperation of people trying to find a home at the moment is very high, and that's allowing really significant rent increases. 

Sascha: [00:08:17] So I'm lying off the end of my lease in May. How long is this going to last? Am I in trouble?

Thomas: [00:08:24] I don't know. I don't have any good news for you on that, I'm afraid, because, one, that it would require some sort of shift in the household formation, which would require us to go back to packing more people into more into fewer houses that require some kind of shift. It probably requires the complete unwinding of work from home. Like, I think that's that's been one of the big factors that everyone needs. It doesn't have a spare room now. They need the Home Office. And even if they're not working five days from home, they're going back to like two or three. They still need that home office. And so that's not freeing up that housing stock. So I don't see that reversing anytime soon. And at the same time, population is growing quite strongly with the Labour Government talking about a record intake of 300,000 net overseas immigration this year. That's a big number. You know, that's the biggest on record. So that's that's certainly pumping demand as well. So supply doesn't change. It doesn't seem to be changing supply if anything supply's really struggling because you had all these supply chain bottlenecks in the construction sector, which which means that a lot of housing stock is sort of failing to come online or taking a lot longer to come online. The supply is not changing, demands increasing. I think renters are in for a bit of a rough trot, even rougher trot. 

Sascha: [00:09:34] Great. Well, that really gets on my face at all. I want to turn back to this idea of solutions and what could be done. This is obviously not going to go away any time soon. But magic wand. What should Australia be doing to make sure that we're avoiding this in the future? 

Thomas: [00:09:54] Um, I think I think there is a really there is a really a case. There's no sort of easy answer because we can't sort of grow the housing stock indefinitely and, you know, keep expanding into greenfield sites and taking up the natural environment that there is some level to that. So we need to like ideally want to think about what's the ideal growth rate of the housing stock, what feels sustainable, and then what kind of population meets that need. So I think it's reasonable to ask the question like is is right now in the middle of a housing crisis where people are lining up for hours just to get a look at a place. Is that the time to be running record immigration? Maybe we want to wait until the housing market stabilises a bit more or we get more housing stock or we get out of these record low vacancy rates that we're seeing before we start really ramping up immigration, if that's the choice we want to make. Where you land on that depends on how you feel about a lot of issues, about how much you want to eat into the natural environment with how it with the housing stock, how much you want to push high density growth, high density housing in urban areas, particularly like leafy inner suburbs, cities. Do we want to pack them out with high rises? How many people do we want the Australian population to be? What feels sustainable? What meets the needs of the economy? There's sort of a lot of questions that you need to sort of answer with that and is kind of why it just keeps ending up in the too hard basket and we keep kind of letting the market do its thing and then the market gives us a crisis and everyone sort of shrugs and goes, Oh, whoops, that's unlucky.

Sascha: [00:11:20] So I am reading a lot of headlines as well, as well as the interest rate headlines. Others that are saying that, you know, this disruption of Airbnb is another cause of these problems. But what I'm hearing you saying is that this is a way bigger picture problem and that those are convenient soundbites to illustrate the problem on a macro level. 

Thomas: [00:11:44] Yeah, I think I think that's right. I think that's right. I mean, I guess if there's one thing I would hope for is that we shift away from thinking about housing as an asset class and thinking about it as a fundamental human need, because it is because the economy doesn't work without housing, that society doesn't work without housing. It's important to put that in the hands of the private market and just let the private market come up with whatever outcomes it decides. That's problematic. And we're and we're bearing the brunt of that. And young people will bear the brunt of that because they're the last into the housing market. And it just getting harder and harder. And not only have houses become much less affordable as prices go through the roof, but now you're stuck renting, but rents are going through the roof as well. So young people are really getting squeezed with this. And and I think it often ends up with these sort of boomers versus millennials kind of dialogue. And the millennials are eating smooshed that too much smooshed avocado and all of that. It's just not true. It is tougher now to buy a home than it ever has been, it is tougher now to rent than it ever has been. The young people have a right, I think, to be angry about how this is working. And I think it starts with the fact that we've turned deliberately turned housing into an asset class, primarily first and foremost and the human needs second. And I think that's where the great mistake is. Was made. 

Sascha: [00:12:59] Well, Thomas, you haven't necessarily put a smile on my face or made me think that there's an easy solution to this. I'm desperately trying to end on a silver lining. Are there any innovative solutions that you've seen used around the world, or would there be anything that you would like to leave us on to get us thinking about as individuals faced with this problem? 

Thomas: [00:13:21] No, I think I think I would I would recommend young people form a political party and get and get angry and get active about this because, you know, like a lot of people I know getting moving into tiny homes and saying young people looking to live in tiny homes is like young people's preference isn't to live in a glorified caravan. They would prefer to live in a proper house if that option was available to them. It's a failure of society that that option isn't available to them, that young people to be on two incomes starting a family can't afford a house. That's a problem like that. We're off the rails there and we need and that we need to fix that. 

Sascha: [00:13:55] Well, I think that's a quote there at the end. Thomas, I'm going to give you another chance as well to plug Comedian vs Economist. You're back this week. I know we're recording this a couple of days at least. You might not have locked in your final choices yet, but can you give me some highlights of some of the economic stories that have happened recently that you're dying to get back behind the microphone and talk about with your brother? 

Thomas: [00:14:19] Yeah, I think I think we're looking at there's the term of the poly crisis. Nouriel Roubini is talking about the mega threats. I think it's a really interesting time to take stock of that, given we're in a bit of a bear market rally. Stock market's picking up, but there are some big dark clouds on the horizon that some people are pointing to. So I want to tick those off. Have a look at those also and have a look at what's happening in China. China's just released data showing that their population has fallen for the first time. So there's a turning point in the Chinese juggernaut. So be really interesting to think about how that's that's going to track out. 

Sascha: [00:14:49] Well, I'm really excited that you're back this week. So that is released on Wednesday. And Thomas, thank you so much for joining us on the dive today. 

Thomas: [00:14:56] Thank you. 

Sascha: [00:14:57] There you go. Not necessarily the silver lining I was hoping for at the end of this episode, but some really interesting thoughts from Thomas about this rental crisis and what I have to look forward to this year when I'm going about resigning my lease. I cannot recommend Comedian vs. Economist enough. So jump in and subscribe if you haven't already. Before I let you go, I do have a really quick favour to ask from you. Our Equity Mates community survey is now live. It will take 10 minutes to fill out. The link is right there in your show notes and there are two prizes up for grabs. $500 or tickets to this year's invest. Please. If you're on the commute home right now. And of course you're not driving. What it does is it helps us understand you, your needs, and how we can do better with our resources, the kind of shows we make in subjects that we focus on. So we would love to hear from you if this is the first time you've joined us. Well, what an auspicious day to join us. Our first episode is back for 2023. There is a massive back catalogue for you to check out. Basically the whole of 2022. If you want to keep the conversation going, then follow us on Instagram. We're @thedivebusinessnews. Contact us by email thedive@equitymates.com Or hit, follow and subscribe wherever you're listening right now and then you'll never miss an episode. I'm Sascha. It's so good to be back with you for 2023. Thanks so much for joining me. Until next time.