Australia’s Renters

Australia’s Renters

Australia has a growing generation of residents who can not only ‘not’ afford to buy, but cannot afford to rent either.  They’re the oft forgotten ‘rental sector’ lost amidst an abundance of market commentary devoted to the ‘good news’ on falling interest rates for mortgage holders, endless ‘forecasts’ of growth for potential property investors, and renovation mania which is set to hit the country once again  as we enter the year’s annual ‘ratings war’ full of obsessive real estate reality shows.

Despite reports assuring buyers that housing affordability has improved, or the persistent and poorly assessed claim that it’s cheaper to buy than rent in an increasing number of suburbs, (the methodology of which I argue against here) the percentage of people requiring rental accommodation is fast gaining pace, and for the past 5 years or so, yields have been rising at phenomenal rates – by and large outpacing both wage growth and inflation for the same period.

The insistence from various commentators that the steep rise in rental prices will push increasing numbers back into ownership fails to consider that inflated yields coupled with erosion of interest on long term deposit accounts has all but cancelled out any perceived benefit for a large proportion of ‘would be owners.’ Consequently, they often have no choice but to lodge with family or friends as they transition through the various stages of job changes and property moves. 

Currently, roughly 30 per cent of Australia’s housing market is made up of renters.  The 2011 census data indicated median rises in rental prices rose sharply over the five year interim, with Western Australia tipping the scales with an increase of 76 per cent over the corresponding period.

As if in step with international markets which mirror our own in terms of political ‘speak’ insisting ‘people have a right to land at affordable prices’, – (albeit in modern times, ‘later rather than sooner’) – owner occupiers have been slowly diminishing and the proportion of renters ‘priced out’ all together, increasing.

Australia’s owner occupancy rate which once sat at 71.4 per cent in the mid to late 1990s, now resides at 67 per cent and forms part of a slow decline of which families with children in particular seem to be suffering.  – The decrease of ownership for this demographic has fallen from 79.5 per cent (2006) to 77.2 per cent in 2011 – and considering the low activity in the market of late, it’s fair to suggest the downward trend is set to continued.

Other reports presented late last year suggest that had ownership percentages stayed at the same level as that recorded in the 2006 census, we’d have ‘welcomed’  an additional 34,000 into the property market.  As it is, despite the 6.1 per cent ‘peak to trough’ fall in the national median house price, and flat prices in most capital city markets throughout 2012, sales turnover over the past two years has been woefully low –back at levels not seen since the late 1990s.

It’s easy to ‘palm off’ the figures as a result of low consumer confidence, however as the latest Fitch ratings report  on residential mortgages pointed out, – Australia still suffers the “least affordable housing” worldwide – and it’s nothing to be proud of. 

As mentioned above, the trend is not localized. In the UK the owner occupancy rate is at its lowest level  since 1988 with 64.7 per cent of the population now classified as ‘owner occupiers’ and the proportion of people renting, rising from 31 – 36 per cent over the preceding ten years.  This is despite a recent “British Social Studies Survey” which indicates 86 per cent of tenants (social included) still foster a strong desire to “own their own home.”

In light of their financial woes the USA is of course no different – their owner occupancy rate is at a 15 year low with roughly 65 per cent of the population now classified as ‘owner occupiers’ and a rental sector which is straining under the pressure of inflated yields and increased demand in capital city locations.

In fact across all property markets which have historically boasted high owner occupancy rates, the rise in the number of ‘home less’ people is strengthening as the vicious circle of trying to save for a deposit in a fiscal environment whilst servicing high rental prices, keeps residents well and truly ‘stuck’ – often in accommodation which is not adequately suited to their family’s needs.

A comment – (one of many) – from a ‘would be’ home buyer, on “Australian’s for Affordable Housing’s” Facebook site last week summed it up perfectly,

“Well I can’t afford to rent let alone buy (and the) stress ..is literally effecting my health”

A closer look at exactly what it costs to rent a modest apartment within commutable proximity to our capital cities is truly eye opening for anyone who may have been out of touch with the market of late.

 In the most recent quarterly bulletin wrapping up the year for 2012, RPData noted that Perth in particular is feeling the strain with an increase in yields of 12.8 per cent for houses and 10.6 per cent for units with vacancy rates as low as 1.6 per cent. According to APM this is an increase of $70 per week over the 12 month period leading Premier Colin Barnett singling rental prices as the “biggest cost-of-living pressure facing Wester Australians.”

As was noted in another report, Darwin currently has only two rental properties listed on realestate.com.au for under $300 per week  – one of which is a rusty old corrugated iron ‘shack’ which would look more at home in a ‘shanty town.’  Whilst the median rent in Darwin is $600 per week.

Students in Queensland have described the market under $300 ‘war like’ and as for Melbourne and Sydney, well it all comes down to the standard of accommodation you want to call ‘home.’

In Melbourne, if you’re half way fussy – perhaps requiring good proximity to transport, a modest balcony, or internal floor space over 40 sqm, you’ll be hard pushed to get a one bedroom apartment in ‘original’ un-renovated condition under a minimum of $350 per week.  In Sydney, the equivalent will cost between $450 and $500 per week – which is hefty chunk for any average wage earner.

To give some idea of the condition of apartments currently for rent at the above prices – this is an interior snapshot of the kitchen in one such apartment I inspected last week in an inner suburb of Melbourne. I think it paints the picture perfectly.

 Image

Students, singles and childless couples can often make do with less space to compensate for the luxury of being close to the city or walkable distance to both transport and shops.  However single mothers, low wage families, retirees or disabled tenants, understandably require something a little more substantial than a one bedroom flat to adequately fulfil their basic needs.

As such, they’d be hard pushed to find anything suitable for less than $500 per week unless they move to the outskirts of the capital city.  And due to poor public transport facilities in many fringe locations, such a move simply isn’t feasible for a large majority of renters – albeit, many are forced in that direction. 

Is it any wonder, reports of ‘crowded houses’ – with three or more families sharing accommodation, rose nationally by 64 per cent to 48,499, in the last census. Furthermore, other data from the ABS shows from 2009-10, 42% of renter households received some form of housing assistance, once again emphasising the growing crisis in this sector of our market place.

Pressure on the rental market is unlikely to ease in the near to far future.  The ABS estimates almost two-thirds of ‘new residents from overseas’ are long term property renters  – this is compared to half new residents from ‘within Australia’ who now class themselves in the same bracket  – which is a robust figure in itself.

Economic conditions such as wage growth, un-employment, consumer confidence and frequent changes of work placements – all reduce the likelihood of a strong owner occupier market over the next decade.  Current policy is built around the general assumption that renting is a ‘step’ on the road to ownership – however  it’s fair to suggest, unless the trend takes an about turn,  tomorrow’s generation will hold a growing percentage of residents for which renting is ‘for life’ and as such, we need to consider their welfare. 

No one should be fooled into thinking private rental accommodation is affordable accommodation; residential investors are looking for strong yields and solid returns.  In a heated market, vendors will understandably go for as much rent as they can achieve (regardless of tax benefits and lower interest rates, which are rarely passed onto the tenant.)

The NRAS (National Rental Affordability Scheme) which was designed to go some way in bridging the ‘affordability gap’ for low income workers sitting on the rental ladder is also flawed in its design – a subject I’ll expand upon at a later date.  When the scheme was first initiated in 2010, the AHURI analysed the project to assess the overall impact in easing affordability. The findings revealed only 40 per cent of applicants using the accommodation had fallen below the 30 per cent ‘housing stress benchmark.  

In the meantime, it’s vital we start to steer policy towards the creation of a fairer partnership between owner and renter.  This would include longer terms of tenancy, protection from exorbitant rent rises, enforcement of basic standards of accommodation (in both the private and public sector) throughout Australia, and a greater partnership between tenant and owner –  which could even envisage the tenant taking on more responsibility for the basic maintenance of their ‘home’ in return for a secure rental ‘plan’ ensuring a longer term of permanent tenancy (5-10 years) for which rent does not outpace the growth of inflation.  Other models of assistance, including Housing Co-operatives, should also be assessed.

The benefit an investor can gain from a happy tenant should not be underestimated. Property – even when maintained through an experienced property manager – is not a ‘hands off’ experience.  Unlike a share certificate you can file away and forget about – the value of any residential property (whether letting or selling) derives from its lasting appeal as a ‘home.’  Ensuring there’s enough money left over from the initial acquisition for ongoing maintenance is vital – and a long term ‘happy’ tenant should never be undervalued.  

There is much that needs to be done to assist the ‘ownership’ of affordable accommodation; however creating a stable market terrain for tenants is equally important and needs an overhaul of current policy if we’re to do so.

Without it, the number of people seeking ‘government assisted’ accommodation will escalate to greater proportions, and the untapped potential of a growing number of residents struggling to make ends meet, will hamper advancement of the overall economy.

Catherine Cashmore

Rate cuts and Christmas Presents.

Rate cuts and Christmas Presents.

The internet’s done some wonderful things for us, Google is now the brain of the universe – any question can be plugged in and answered (albeit with a hefty disclaimer along the lines of ‘react at your own risk’) However, it’s also fragmented the time we take to digest information which, in a pre-internet age, invoked many to devour a newspaper cover to cover on a Sunday afternoon and come out feeling at least partially educated.

 Now some of our most important markets are analysed by a myriad of voices all desperate to be the first to break the news via a twitter link or a hastily written column under a flashy headline which –when coupled with the pressure to publish at break neck speed and grab the top Google ranking – can be both misleading and conflicting in the information provided.  

In addition – the frequency at which data and statistics are produced from a range of different providers, evokes microscopic media analysis which can prevent any sensible overview until there’s enough distance to look back and take stock – a situation which doesn’t usually evolve until the end of either the financial or calendar year.

As a case in point, R P Data’s daily house price index is ideal fodder for trigger happy attention grabbers, and often has me humming that old classic ‘Those Magnificent Men in their Flying Machines  with the lyrics – “Up, Down, flying around, looping the loop and defying the ground”  – Because if ever there was a roller coaster of irresistible headline capturing sensationalism, the fuel for it can be found in the “daily house price index” – of which media releases hit my inbox both weekly and monthly.

In any one week, property prices can be up , down, or flat depending on which way you look – north south east or west, and in some cases, which day of the week you choose to concentrate on.

As a case in point, early in the year, Melbourne readers had been informed that the market was in a state of permanent demise with “values in Melbourne declining fairly quickly” and no hope of recovery on the horizon for the remainder of 2012.

By March however, the daily house price index had been ‘formally’ released and relief was only moments away.

 June’s data showed Melbourne’s housing market was up a whole 1 per cent!   And after a period during which we nourished ourselves on housing collapse headlines, arrayed with pictures of downward pointing arrows and ‘More Bleak Times Ahead’ news reports, RP Data’s figures provided a welcome ray of sunlight compounded with media reports of housing market recovery!  

According to RP Data “After reaching a trough on the 11 June” (note: – not the 10th OR the 12th for that matter), “Melbourne dwelling values have now recovered by an impressive 1.7 per cent.” All was not lost and the media reflected as such.

July’s daily house price index informed that rises were ‘not as broad based’ as the June results.  However, in Melbourne, excitement prevailed when vendors were informed values had risen a booming 1.4 per cent over the four weeks to July 31.  “Melbourne was the strongest performing capital city housing market over July” It really seemed too good to be true.

And then came August. August flagged concerns because values had flat lined with only a 0.2 per cent rise for the month.  Could rises be sustained? Asked R P Data’s Tim Lawless – we all waited in anticipation as the ‘daily’ results continued to filter through.

But along came September with a reassuring stomp!  A 1.4 per cent increase in September had Melbourne once again rising from the ashes like a glorious falcon of hope, especially when Mr Lawless informed that values in our most “liveable capital” had recorded a 4.0 per cent surge since the month of May, “which is the largest recovery so far across all the capital cities.”  Hooray!  

Any hope of celebrating through to Christmas was put to bed in October during which the index recorded a relatively huge wack in the form of a -1.1 per cent drop which was followed in November by a second 1 per cent drop and Melbournians were informed that their city was the ‘only capital market’ to suffer a slide on the national barometer.

The headlines once again went to town with their downward pointing arrows, however the data confirmed what most of us in the housing industry knew already (even if we weren’t going to admit it in front of a Saturday afternoon auction crowd) that house prices – in Melbourne at least – really haven’t moved from woe to go. 

Despite miniscule changes in the median data, In reality, they’ve been flat as a pancake for the entire year.  Hopefully it won’t come as a ‘shock’ to any imagining house prices have been ‘changing,’ that when analysing data to provide a market appraisal of any said listing, my eyes will filter as far back as ‘June’ if necessary for a comparable sale – despite the somewhat ‘bumpy daily index’ road of media sensationalism.

Along with the relative inadequacy of the daily house price index in assessing forthcoming trends  -albeit in its infancy of development,  R P Data also released a long list of suburbs earlier in the year, for which it was supposedly cheaper to buy than rent.  The inaccuracy of the report was astounding – as I pointed out here – however it didn’t stop the media going to town with little time to assess the reality behind the analysis.

Even without any on the ground assessment, if it were really cheaper to buy than rent, we wouldn’t have rising numbers sitting on public housing lists or seeking rental assistance (as all welfare agencies will readily attest,) first home buyer numbers falling, household sizes increasing, and young people ‘choosing’  staying in the family home well into their 30’s.

It’s as hard – if not harder – to find affordable accommodation in locations most need to live (close to work hubs and transport) particularly for single income units – and figures from the latest census data stack up as such, with the largest jump in the number of individuals sharing accommodation.

 Furthermore although housing affordability has show some improvement, rising rental prices and erosion to the interest rates for long term deposit accounts, all but cancel out the benefit.

And while Wayne Swan is once again reaching his arms around his posterior to pat himself on the back for keeping rates “lower than the last government” – and Joe hockey is doing the media rounds to tell us how awful Australia’s economy is performing obviously hoping the news will help Julia Gillard ‘fall on her sword’ when the long promised stimulus fails to eventuate – (at least without serious fiddling of the books.)  All I can say is it’s a good job Kate Middleton is pregnant – or from would our good news come?!

It’s commonly stated that the RBA take careful note of R P Data’s daily house price index, and from the following media releases, I’d asses they are just as confused as the rest of us as to whether housing prices are improving or not.

Following this year’s first interest rate cut in May, the media release from the RBA read

“Housing prices have shown some signs of stabilising recently” which was a verbatim repeat of Aprils’ statement.

In June it was noted

“Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again.”

In July it was noted

“The housing market remains subdued

But by August

Dwelling prices have firmed a little…”

The same ‘firming’ statement was repeated in September’s media however by October dwelling prices were once again

“Subdued”

November seemed more positive as the RPA reported

“the housing market has strengthened

And most recently following Decembers cut of -0.25 per cent Governor Steven’s noted that;

“there are indications of a prospective improvement in dwelling investment.”

However, throwing forward thinking terms such as “prospective improvement” and other wishy washy statements such as those noted above, are no reassurance from the experts – with the best and most reliable data at hand – that the market is either “subdued” or “firming.”

In fact the RBA seem no better informed than the rest of us on such matters – jumping on each tiny notion of movement which may – (or may not) – hint of a forthcoming ‘trend.’

The pickup in housing as we approach the end of the year is – in part – a seasonal expectation.  As December nears its end, there is always a last minute rush of buyers as they try to tie up deals before the real estate world takes its annual Christmas Breather.

Post Christmas most are recovering from too much Champaign, turkey and weighty credit card debt to pay the property market much attention – with one exception – investors.

As the latest ABS data attests, the erosion of interest rates on long term credit accounts is clearly luring this demographic back into what they probably assess to be their best ‘long term bet’ amongst a range of low performing sectors.

Speculation that growth in the economy will fall to 2.5 per cent during the year ahead – well below the usual trend of 3-3.25 per cent – is why many are ‘assuming’ a further -0.25 – -0.50 per cent drop in the cash rate is needed if we’re to stimulate the ‘non-mining sectors’ of our economy. 

Should this occur, and the banks ‘pay it forward,’ it will take lending rates low enough to provide a greater incentive for potential property shoppers to make their move. 

However, consumer sentiment plays a far stronger hand in dictating future movements in our economy – and this is one area of influence even the best Crystal Ball readers fail to either predict or dictate.

Catherine Cashmore