The Solution To The Rental Crisis

Soaring rents are the latest chapter in our inflation saga.

Sydney unit rents jumped $120 a week in just 12 months, and the median weekly rental is now a staggering $711. Ouch.

It is a whiplash turn of fortunes. Not only have we arrested the previous declines in the rental market, we have surged to record highs thanks to ever tight supply and runaway demand. Every property economist is giving the same word of caution, keep some Vaseline for the financial burn.

But does it have to be so tough for renters?

Here are four solutions that would make life easier for the next generation of Aussie renters.

1. Sweeping changes to zoning and city planning

Our cities are hamstrung by poor planning and restrictive zoning. Changes to planning incentives can fix this.

Most of our urban land is zoned for detached housing, rather than townhouses or apartments. This is a flow on effect from the ‘Australian Dream,’ which saw councils try to appease our desire for space with large detached homes. There was no ‘studio apartment’ clause. Decades later we are left with suburbs on the outskirts of our cities with plenty of expensive, spacious homes but few small, affordable housing options. Think of the Eastern Suburbs or Northern Beaches.

Poor planning has made this problem worse.

High-density property classes that should be affordable are too expensive for the buyers and renters who need them. This stems from restrictive government policy which has prevented the construction of apartments and townhouses in affordable suburban areas.

Put simply, the apartment boom was not equally distributed.

Local governments went too aggressively on rezoning the already unaffordable inner-city areas instead of low-cost suburban areas. This has meant an undersupply of cheap townhouses and units in areas that working class Australians can actually afford to purchase. So instead of buying an affordable apartment well out of the CBD, you are forced into purchasing one much closer, which brings with it a price premium.

On the supply side, planning restrictions force developers to compete for a dwindling stock of suitable plots. Very few areas are zoned for high rise apartments that could make a dent in our supply problem. For the apartments that do go ahead, the government limits the maximum height and the number of dwellings. This only serves to exacerbate a chronic supply problem.

Like any restriction on supply – for example the limits on toilet paper during lockdown – this spurs on frenzied demand and pushes up the price.

How to fix this?

The Federal government should provide incentive payments to align local decision making with the national best interest. Injecting capital into areas that build more housing would reward councils with higher development volumes while punishing the others. These ‘incentives’ could be in the form of assistance with infrastructure projects, or greater investment in arts and recreation which improve quality of life.

The line between pork-barreling and incentives should be clearly defined. The goal is not to reward cash hungry developers. Rather, it is to provide the necessary infrastructure to support more development, in a sustainable way.

Financial incentives should coexist with reform to our local planning systems. Councils should seek to integrate restaurants, small businesses, parks, and the arts into public spaces. A great example of this is Chippendale, which seamlessly blends sustainable high rises, green space, quality of life with Spice Alley, and arts with White Rabbit Gallery. You want to avoid creating another Mascot.

No shade to Mascot, but concrete jungles with minimal green space and limited lifestyle infrastructure are not what we want. Where are the parks? Where are the vibrant public spaces! Over-development can be a curse on a local council. High density does not have to mean high compromise; it is all about finding the right balance.

2. Shift the debate away from tax concessions.

While negative gearing is a popular scapegoat for our dysfunctional property market, it is actually a non-issue for affordability. Research estimates that CGT discounts and negative gearing together drive a 1 to 4 per cent change in prices. Bugger all.

To make negative gearing more useful, it should be increased for newly-built and build-to-rent gomes, and decreased for existing homes. While negative gearing in its current form simply reshuffles a fixed supply of housing, a refocused policy would create a real incentive to fund new builds.

This would pay a long-term dividend. Any change to negative gearing would become deeply embedded in our taxation and financial system. It would pivot the strategy of property funds and mobilise savvy investors to support an essential cause. While it may be a political challenge, a few tweaks could make a significant difference to affordability.

3. Limit rent increases

Basically all of our important industries have price controls, except rents.

No no no you can’t do that, rent control makes property uncompetitive. Back in my day…

Sorry for that interruption, the ‘back-in-my-day apologists’ are everywhere. Let’s have none of that talk. Electricity, gas and water are all regulated yet post multi-billion dollar profits. Energy networks, perhaps the best regulated oligopoly, garnered $10 billion in supernormal profits from Eastern Australian consumers in 2022.

So clearly price controls can be effective in the utilities space. But how would we apply a similar model to property?

We can look to Canberra as a template.

The maximum increase in annual rent is 110% of the most recent increase in Canberra rents reported to the Bureau of Statistics. In the year to March, Canberra rents climbed 5.54%, making the maximum permissible increase 6.1%.

Canberra landlords don’t seem to be too upset either. There has been no mass withdrawal or rapid turn of fortunes for the Canberra property market. In fact, it has the highest vacancy rate of all Australian capital cities. Price controls eases pressure on rents and create a more sustainable market in the long term, where tenants can afford to pay on time and uphold their obligations to landlords.

4. Increase requirements for new developments to offer affordable housing

The National Rent Affordability Scheme (NRAS) should be a model for future plans to keep rents affordable. The NRAS worked by giving property owners a subsidy to keep rents on new homes low for a decade.

It is a groundbreaking approach and reveals a different philosophy to housing; that renters deserve the same security we give to property owners.

Offering a subsidy to developers who embed low-cost housing options into their development plans would increase supply of affordable housing. If this was a one-off payment made at the start of a development, the government can maintain low ongoing costs (which are prone to blowing out) and keep the plan sustainable. This would compensate developers who would earn less in the long-term from the properties marked as ‘low-cost housing.’

State planning authorities should also make approval contingent on supplying low-cost housing, especially in medium and high-density developments.

Carving out just 10-15% of a property development for affordable housing would not depress profits too greatly and would give low-income renters more security. This allows them to rent in attractive locations they would not be able to afford otherwise and alleviates the stress of homelessness.

To summarise.

Bringing down rents and accelerating new home builds will be anything but easy.

It is going to take a sustained commitment, coordination across multiple parts of government, and genuine bipartisanship. Some of the steps we need to take are obvious and straightforward – like limiting rent increases. Others are delicate and complicated, like changes to zoning and planning rules.

Now is not the time to play possum. If we don’t act now and stay the course, a generation of Aussie renters could be poorer and less secure than ever. This will definitely impact the property market.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.