3 ways to ease the rental crisis

With the country plunged deep into a rental crisis, an expert unpacks the factors that led to this rabbit hole while offering three ways out.

Colin Lee, founder and managing director of Inspire Realty and a member of the Property Investment Professionals of Australia (PIPA), said the spiraling rental market conditions are being driven by anemic supply in the market unable to keep up with a surge. required.

“It seems that for the first time in decades, the demand for rental housing far outstrips the supply,” he commented.

The expert pointed out that the imbalance between supply and demand has had serious consequences for Australians who are struggling to find a roof over their heads.

“[In] Some jurisdictions, rental listings are receiving an unprecedented number of tenant requests, with missing people being forced into temporary accommodations such as camping, couch surfing, hotel rooms and even vehicles,” Mr. Lee.

According to Mr. Lee, getting to this crisis point took years.

Citing August data from SQM Research, he pointed out that vacancy rates in capital markets are now generally below 1% – figures which he explained indicate an “extraordinarily” rental market. tense”.

“For those who don’t know, a balanced rental market has a vacancy rate between 2 and 3%. At over 3%, the supply of listings exceeds tenant demand, so rents tend to stagnate and/or fall. Below 2% and demand is much higher than supply, so rents are going up,” Mr Lee said.

He pointed to the growing disincentive to real estate investment which has deterred people from becoming homeowners and ultimately led to a decrease in supply.

This drop in supply coincided with an observed increase in housing demand, which Lee said created the perfect storm for tight rental conditions.

He further expects this misalignment of supply and demand to only increase, as international borders reopen this year.

The expert also attributed the shortage of supply to the “severe tightening” of lending to property investors over the past seven years.

According to Lee, a pivotal moment that led to increased regulatory scrutiny was the royal commission’s inquiry into misconduct in the country’s financial services sector between 2017 and 2019, which led to significant reforms in the banking sector.

The final recommendations of the watchdog’s report have also had a ripple effect on the real estate sector. “[It] prompted the Australian Prudential Regulation Authority (APRA) to order banks to reduce the growth of their portfolio of investor loans/financiers responded by increasing loan reserves, raising loan-to-value ratios and applying interest rates higher interest rates on investor loans. This made it harder to borrow to invest,” Lee explained.

The expert argued that the decision to make it harder for property investors to get a mortgage than for homeowners was financially ironic.

“Investors are a less risky option than owners when it comes to defaults. You see, investors are more likely to sell an asset and manage their way through times of financial difficulty on their own,” Lee said.

Next, he criticized the prevailing “anti-investor” rhetoric and regulation in the political sphere.

“We have already been entrenched in a regime that has seen higher advisory rates, stamp duty, CGT and other charges for investors compared to owner-occupiers,” he said.

He argued that the additional costs borne by investors are barely outweighed by negative leverage benefits, despite what anti-investor groups might say.

Another challenge real estate investors face is from tenant advocacy groups, who believe rental prices have risen at an exponential rate.

However, Mr Lee countered that the evidence “proved otherwise”. “If you look at the numbers, the increases since 2020 encompass a rebound from the start of the pandemic when rents were frozen and evictions banned,” he said.

“Ironically, it was around this time that owners were asked to step in and ‘get one for the team,’ which many did without complaint,” the pundit said.

He cited data from a recent study which showed that over the past 10 years rent increases have actually been half the rate of inflation.

Joint research by investor group Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA) and released in late August analyzes capital cities and uses the Australian Bureau of Statistics Consumer Price Index for June 2012 to June 2022 found that rents rose only 11% nationally over the decade, but inflation rose 25.6% over the same period.

With that, Mr Lee said recent rent increases are “just a catch-up” as rental returns are not enough for landlords to meet rising costs.

He also called out states that are rolling out tenant-focused legislation rather than landlord-focused legislation, causing stress for investors.

“Changes allowing tenants to have pets as a right, to modify their homes and even measures to restrict the termination of tenancies have seen landlords gradually lose control of their precious asset. It takes them away from ownership and away from other investment vehicles,” he commented.

He said while some steps have been taken to improve dismal investor sentiment, such as the scrapping of Queensland’s controversial property tax law, there is still work to be done to improve the rental situation.

Here are three steps he proposed that will help buck the rental trend and provide more homes for renters.

1. End anti-investor rhetoric

Mr Lee first called for an end to the ‘demonization of investors’, saying that ‘the average Australian investor is likely to be a middle-income homeowner who owns an investment property and is just trying to save for a better retirement.

“They don’t want to collect a pension and be a burden on the taxpayer. They are ordinary people with realistic long-term goals,” he said.

Mr. Lee notably called on those in political power to stop painting investors “in a bad light”.

“This political conduct is preventing average Australians from investing and hurting rental supply,” the expert said.

2. Stop financially deterring investors

Mr. Lee said that since investors are already feeling severe pain from the taxes and additional costs associated with owning an investment property, their burden must be lightened – not added.

“As painful as these costs are, most investors bought their assets knowing the rules and choosing to play with them for the long haul. If governments just stopped shifting the targets looking for ways to get more income from investors, that would be a positive step,” he said.

He said that instead of viewing investors as people looking to profit from the demise of others, governing bodies should see real estate investing as a win-win situation.

“Yes, investors are looking to grow their wealth, but they do that by providing housing for people who can’t or won’t buy their own homes,” he said.

3. Increased collaboration/engagement with investor groups

Finally, he called on politicians to step up their engagement with everyday investor advocates to help shape plans going forward.

“There is a wealth of information we can provide to all levels of government, but few seek our advice. By involving investors to help chart the course, we can find a way to defeat this crisis for the benefit of all,” he concluded.

3 ways to ease the rental crisis

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Last update: October 25, 2022

Posted: October 25, 2022

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