Australia’s Housing Market: No Country for Renters

Nothing gets pulses racing in Canberra like the prospect of a double-dissolution election. Over the past week, the Labor Government’s $10 billion Housing Australia Future Fund Bill was again blocked by the Greens and Coalitions. According to Labor, its election mandate on addressing housing affordability is being blocked by an “axis of evil”!

While there is debate over the solution, there is no denying the problem: Australia has a housing affordability crisis.

For many years, the focus was on home ownership but since the end of the pandemic and the rise of inflation, it is renters who seem to be suffering most. Our chart of the month below shows the rise in rents relative to inflation since 2006.

Source: RBA Bulletin, June 2023

The rise of renters

Over the last 40 years, the percentage of rented dwellings has steadily increased while the percentage of full-ownership has been falling (see chart below).

In 1981, only 18 percent of homes were rented while 33 percent were owned. In 2021, 27 percent were rented, just slightly less than the 30 percent of owned dwellings.

The Australian dream of owning a house has been replaced by the reality of renting. 

As a percentage, more Americans, British, Canadians, French, and Italians now own their home (mortgaged or outright) than Australians.

Australian houses used to be much more affordable relative to our incomes compared to these other countries, but as the chart below shows, that is no longer the case.

Source: Australian Institute of Health and Welfare, housing dashboard

The rise in rents

This long-term increase in the number of rented homes has now been met by sharply rising rents in the last two years, as can be seen in our first chart.

On the supply side, a decrease in the construction of private dwellings since 2018 has meant that there are less potential places to rent than would otherwise be the case (see chart below).

While private dwelling approvals have rebounded strongly since the end of the pandemic, it will take time for the new stock to enter the market. Further, new dwelling approvals have started to slow.

This reduced supply has been met by a spike in demand caused by the reappearance of international migrants and  international students. Some renters who have been priced out of the housing market because of higher interest rates. As a result, vacancy rates across Australia have rarely been so low and this has pushed rents up higher than inflation (see chart below). This has particularly been the case in the outer-suburbs in the capital cities.

Source: RBA Bulletin, June 2023.

What does this mean for Private Debt in Australia?

Despite the increased financial pressure on renters and mortgage payers, unemployment remains low and the economy is still growing. Companies are still looking to borrow funds, which means that there are still plenty of opportunities in private debt. Plus, there is still more room for interest rates to go up, which will push up the floating rates of deals.

The economy will eventually slow and when it does, it will pay to be invested with private debt funds who have the best lender screening and relationships.