Game of homes!

We are increasingly being delivered news reports on the worsening affordability crisis – whether that be groceries, power supply or housing. Not only has home ownership slipped from the reach of most first home buyers, particularly in Sydney, now it is rents that are becoming progressively unmanageable.

So how did we get into this predicament?

Again, it seems the all-pervasive pandemic shoulders a lot of the blame with several factors at play including:

• A notable decline in the average household size from late 2020, partly driven by a reduction in share housing – meaning more dwellings were needed even when population growth was close to zero in 2021.

• A rapid increase in the Australian population from late-2022 as international border restrictions were lifted.

• A temporary shock to investment housing activity between May 2022 and February 2023 as interest rates rose. Investor activity has picked up markedly since, but there is still a lot of catch up required in establishing new rentals.

There are also some longer term factors that have increased demand for rentals.

• Social housing supply has decreased as a portion of all dwellings over the decades which has put more pressure on the private rental market.

• The rate of home ownership has also declined.

• The average household size has also been gradually declining due to economic and demographic factors (for example, more people living alone), thus requiring more dwellings.

• Rent value increases have broadly outpaced wage and income rises at the national level, meaning rental affordability has also deteriorated. 

Data shows that rent growth was starting to slow last year, which was good from an inflation perspective. This may be due to affordability constraints driving renters back to share housing, or to cheaper markets. There has also been a resurgence in investor activity through 2023 which may be gradually helping to ease supply-side constraints.

However, the latest signs indicate that Sydney rental prices are starting to speed up again.

Interestingly, where there has traditionally been a wide, and sometimes prohibitive, divide between unit rents and house rents, this gap has narrowed. It is thought that this may be enticing renters into houses rather than units, thereby diminishing the number of houses available.

Despite all of this, welcome news for tenants is that rent growth is expected to slow this year. Factors that have been considered when coming to this prediction are:

• The continued increase in investment lending

• A normalisation in net overseas migration

• The potential for interest rates to drop

It still remains that in the shorter term the burden largely remains on tenants to secure cheaper housing, whether that be by re-forming share house arrangements or reconsidering a move to regional or outer suburban markets. For Sydney landlords, particularly those with properties in central suburbs, demand will remain high with little or no negative effect on their investment.