The hard truths about our rental crisis

Meet Marsya.

Marsya is 27 years old and currently a tenant in Cooper St, Strathfield in Sydney.

Marsya has just completed her Masters in Design and works full-time.

Marsya has been renting the same property for almost three years with her roommate. When they moved in two years ago, in 2021, Marsya and her roommate paid $450 per week. The following year, the rent increased to $500 per week, and currently, the girls now pay $650 per week. Recently, Marsya was served a formal Notice to Vacate by her landlords as they are looking to sell the apartment.

Since receiving the notice, Marsya has spent most of her weeknights and weekends looking for a new home.

For Marsya and her roommate to compete with the current rental demand in Strathfield, their budget needs to increase by a further $100 to $750 per week. When Property Managers consider and approve tenants based on the ‘30% rule’ (that’s the allocation of 30% of income for rent), Marsya is now allocating 45% of her income to her share of the rent.

And the process is the same. Look online. Find something that ticks most boxes. Register online to inspect the property. Attend the inspection. Wait in a line with another 20 to 30 people also wanting to inspect the property. Apply for the property. Wait. Get told you’re unsuccessful (that’s if the agent gets back to you). Look online. Find something… etc. Marsya has attended over 20 plus open inspections.

As of today, there are only eight comparable apartments available in Strathfield, and Marsya has about 18 days left to secure one.

Meet Charlotte.

Charlotte is a part-time working mum.

Charlotte and her husband, Daniel, settled on their first investment property in July 2021.  On the same journey taken by most middle-class mums and dads looking to better their financial future at retirement, they’ve invested most of their savings to secure a one-bed, one-bath, one-car spot in one of Melbourne’s highly sought-after locations.

In July 2021, the highly sought-after location of Hawthorn had a vacancy rate of 10.8%! That’s almost ten times what it is today. At the time, the prospective tenant pool was forced to share accommodation or locked out of the country. Eight weeks after settlement, their apartment was leased for a mere $345 per week. This was well below what they expected and budgeted for.

With a locked-in rent of $345 per week for 12 months in a city that was still in and out of lockdowns and under restrictions, Charlotte was required to use her savings to help manage her costs.

In May 2022, interest rates started to lift and, as we now know, lifted for ten consecutive months. Charlotte had to dive further into her diminishing savings to cover the now-increased mortgage repayments. Fearful that they would lose their current tenant and couldn’t budget for an extended vacancy period, Charlotte implemented a conservative rental increase of $40 per week once the tenant’s first lease expired, bringing the weekly rent to $385 per week. This rest was still at least $100 per week behind where the rental market value should be.

Laws in Victoria only allow rent increases every 12 months, so today, Charlotte’s tenant still pays $385 per week. With increased interest rates, Charlotte and Daniel are paying an additional $900 toward their loan repayments every month. For Charlotte and Daniel, that’s approximately an extra 20% of additional expenses to the normal daily obligations that we all have.

The ‘rental crisis’ that we have all become accustomed to watching and reading about almost daily is hitting hard for not just tenants but also landlords like Charlotte.

But here are the hard truths about the situations both Marsya and Charlotte find themselves in.

Hard Truth 1. Rents are too high because landlords are greedy – WRONG.

As outlined in the Charlotte example, you don’t have to be a rocket scientist to figure out that investors’ costs have increased. An increased interest rate from 2% (which they were paying back in May 2022) to around 5.5% now means they have almost tripled their interest cost. Applying an increase to their tenant is pretty much the same as the fruiterer charging more for bananas because it costs them more to buy.

The reason that these increased rents are acceptable in the market is dictated by the demand for that property. The current demand for rental property is high. Why? Because demand outweighs supply.

Vacancy rates across the country have tightened, and we are now at a national record low of 1.1% vacancy. To put this into context, as of 1st April 2023, there were just under 95,000 rental listings nationwide. That’s 17.3% below this time last year and almost 40% below the previous 5-year average. That’s pretty damn tight when it’s estimated that a person or group of people in need of housing is around 377,600 households.

Where is this lack of supply coming from? Lots of places – returned students and migration, the slowing completion of new housing caused by increased construction costs, investor exit during the 2021 property boom, the 110,000 dwellings that were previously long-term rentals are now running as Airbnb, and more.

Hard Truth 2. Landlords can increase rents to whatever they want, whenever they want – NOPE.

Nationally, there are governing bodies in each state that police what and how rents can be increased.

Except for the ACT, there is no restriction on how much a landlord can increase rent. HOWEVER, the landlord must demonstrate that the increase is based on market rent. You have to provide actual comparables, proving that the rent increase being asked is what a tenant would have to pay if they were looking for a rental property on the open market. In the ACT, it is legislated that the rent cannot exceed CPI. The method is bizarre and complicated, but it’s the ACT, so we expect nothing less.

In all states, a tenant is given 60 days’ notice that an increase will take place. In the ACT, it’s 8 weeks’ notice.

The frequency of increases (outside of a fixed-term agreement) is every 12 months for VIC, NSW, SA, and Tasmania. Queensland is in the process of also moving to increases every 12 months, but this won’t take place until July 1, 2023. In Western Australia and the Northern Territory, rent can be increased every six months.

For Charlotte, the fact that rents in Melbourne can only increase once every 12 months means that despite her increased interest rates, she won’t be able to narrow the gap for another 6 months at least.

Hard Truth 3. The increased rent covers the landlord’s repayments costs. – NOT FOR MOST.

It’s an age-old generalisation – landlords are wealthy people who sit back sipping their expensive wine, counting the hundreds of dollars paid by their disadvantaged tenants who are forced to rent because they are poor and can’t afford to buy a property for themselves.

Landlords are like you and me, everyday Aussies who are simply trying to better their financial future through the benefits of property investing. Investing in property isn’t easy. Landlords carry all of the risks that come with owning an investment property. The rent, even in this market, doesn’t always cover the expenses like insurance, body corporate fees, special levies, land tax, annual appliance checks, maintenance, repairs, etc.

Whilst rents are increasing rapidly due to the factors mentioned above, so are the costs associated that come with owning an investment property. Whilst some older, long-term investors may be reaping the rewards of the increased rents, that’s generally not the case for most other investors.

And let’s not forget some of us have suffered through the past three years of high vacancy, reduced rent, and minimal or no increased rents.

Hard Truth 4. Capping rent increases will solve the ‘rent crisis’ – ABSOLUTELY NOT.

In Australia, 26% of rental housing is provided by ordinary Australians. Rent control, through capping rent increases, will unquestionably result in a massive exit of the already diminishing property investor pool – meaning investors will sell.

Capping the possibility of growth with any investment is a massive constraint that will make it impossible for people like Charlotte to provide rental property for people like Marsya.

Hard Truth 5. The final point – let’s get more investors in the market!

Investors are sold on growth strategies. Suppose the focus shifts to helping more people invest in property rather than restricting the very thing that provides homes to 26% of the current population compared to the 3% provided by state and territory housing. In that case, more everyday Aussies will do it.

And more will. It’s a case of simple economics – where there is demand; there will always be supply. If demand exceeds supply, prices will rise, and for as long as property prices have been recorded – investors are the beneficiaries of that rise.

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