It’s official. The Australian federal election has been called for May 21.

 

It’s likely that one of the bigger discussion points in the lead up to the election will be housing affordability.

 

The affordability of housing is a big issue for Australians, and one often talked about in the context of buying. But it’s an equally significant challenge when it comes to renting.

 

The vacancy rate for rental properties in Australia today is the lowest it has been since 2006.

 

Experts consider a balanced rental market – one where landlords and tenants are equally balanced – to be a vacancy rate somewhere between 2.5 per cent and 3 per cent. Today, the vacancy rate in Australia is just 1.2 per cent.

 

Here is the city-by-city breakdown:

 

 

Vacancy rate (%)

Sydney

2%

Melbourne

2.3%

Brisbane

0.9%

Adelaide

0.4%

Perth

0.6%

Canberra

0.5%

Darwin

0.7%

Hobart

0.3%

Australia

1.2%

 

As you can see, all the main capital cities are sitting well below 2.5 per cent, with Brisbane, Adelaide and Perth having vacancy rates below 1 per cent (which is extremely low).

 

For the past two years the national vacancy rate has sat at 2 per cent. It has only been over the past 12 months that it dropped considerably, from 2 per cent to 1.2 per cent.

 

What’s causing low vacancy rates?

 

With international borders closed for the majority of the past two years, there has been much less demand for new housing. Therefore, there is really only one explanation for the lower vacancy rate: not enough supply.

 

In this respect, the pressure on supply has come from two directions:

 

  1. Conversion to owner occupier: 68 per cent of houses in Australia are owned by owner occupiers. Last year, three in four (75 per cent) of all homes sold in Australia were sold to owner occupiers (an increase of 7 per cent).

 

That means there were a bunch of homes which were previously owned by investors which were sold to owner occupiers. When you apply that theory to the more than 650,000 sales that occurred last year it makes a big difference to the supply of rental accommodation.

 

  1. New rentals: we still have to build new rental homes each year because we have more people entering the market. There are about 140,000 more births than deaths each year in Australia. Those born 18 or 20 years ago are now moving out of home and looking for a place to live.

 

A third pressure on rental supply exists for places like Brisbane, Adelaide and Perth where, in addition to the above, those cities are experiencing increased interstate migration. Those cities have not only had pressures on supply, but also increased demand on top of natural population growth.

 

The by-product of these extremely low vacancy rates is increasing rents.

 

Rents are up by nearly 10 per cent in most Australian cities over the past 12 months:

 

 

Chance in rents year on year (%)

Sydney

9.0%

Melbourne

4.9%

Brisbane

11.6%

Adelaide

9.0%

Perth

6.7%

Canberra

9.7%

Darwin

6.7%

Hobart

9.0%

 

By contrast, wages have only increased by 2.3 per cent in the same period. That’s a huge affordability problem – the rent expense in people’s budgets is increasing at a rate two to four times faster than income.

 

It’s hard to see the situation is going to get any better for tenants, either.

 

The Federal Government has forecast net overseas migration to pick up significantly over the next four years:

 

 

Projected? Net Overseas Migration (people p.a.)

2021-22

+41,000

2022-23

+180,000

2023-24

+213,000

2024-25

+235,000

 

This means an extra 630,000 people will be moving from overseas to Australia by the middle of 2025.

 

The average household consists of 2.6 people. Based on the above numbers, we’re going to need an additional 70,000 to 90,000 new rental dwellings per annum just to cater for overseas arrivals.

 

That’s on top of the ones needed to lift our record low vacancy rate and cater for the natural increase from births over deaths.

 

We’ve built a total of 35,000 new rental properties per annum for the past two years in a row.

 

The answer will be to unlock more housing supply – that’s controlled at the State Government level – and provide incentives for investors to get into the market and do the heavy lifting on supplying those rental properties.

 

For investors, it provides an opportunity to increase cash flow over the next few years. With such an undersupply of housing, it makes sense that rents will increase at a rate higher than inflation and wages.

 

Rent increases should also offset most, if not all, of the increases to interest rates that will inevitably occur over the short to medium term.