Why Are Rents Going Through the Roof?

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Last Thursday, Wayne Swan and Tanya Plibersek launched the National Rental Affordability Scheme. The $623 million scheme aims to increase the supply of affordable rental dwellings by 50,000 by 2012.

One of Labor’s lesser known election promises, it is also one of the most important, addressing an issue that has reached crisis point for hundreds of thousands of Australian families: paying the rent.

As anyone trying to find a place to rent right now will tell you, rents are rising rapidly. Recent data from Property Monitors found rents have risen 17 per cent in the past year in Perth and Melbourne and 15 per cent in the past year in Sydney. In Sydney, rents have spiked 8 per cent in the past quarter. No wonder the Reserve Bank is keeping a close eye on inflation, with rising rents contributing to the 1.5 per cent increase in the CPI for the June quarter.

Why are rents going through the roof? The answer is either simple or complex, depending on how closely you look at it.

The simple answer is supply and demand. With Australian immigration running at record levels and many Australians simply unable to afford to buy property, demand for rental accommodation is very strong. Meanwhile, supply is anaemic. Despite a massive asset price bubble in housing, Australia hasn’t actually built many houses in the past decade. The rise in house prices has meant huge mortgages for many homeowners and landlords. With vacancies at record lows, landlords now have the pricing power to push up rents as they struggle to afford their inflated mortgages.

The deeper reasons for Australia’s housing affordability crisis are more complex, as Fiona Allon’s important new book Renovation Nation (profiled here in newmatilda.com) describes.

"For both younger people and low-income households," Allon writes, "it is now increasingly difficult to step onto the property ladder and enjoy the benefits that homeowners take for granted. What they’re discovering is that while there may still be a property ladder, the lower rungs have been removed."

Part of the problem is the received wisdom of Australian politics that home ownership is the be-all and end-all of housing policy. The result, as I wrote recently, has been a conspiracy between governments, landlords and homeowners to increase house prices. Since 1999, cheap money, rising wages, high levels of immigration and massive tax concessions have helped create an asset price bubble in housing. Housing is now very over-valued, in terms of both average wages and the yields on rental properties.

While the housing industry likes nothing better than to complain about fees and taxes – like land tax and stamp duty – the property sector is in truth the favoured child of the Australian tax system. The Federal Government in particular gives massive tax concessions to owner-occupiers and landlords in the form of capital gains tax as well as providing land tax exemptions, negative gearing and generous write-offs for owners of empty buildings. As the recent Senate Committee on Housing Affordability reported, "the combined total of capital gains tax arrangements, land tax exemption and negative gearing arrangements is estimated to be in the order of $50 billion per year." Compared to this vast sum, the $623 million earmarked for the National Rental Affordability Scheme is a drop in the ocean.

Another primary cause is the shape and structure of Australian cities. Australian urban planning is a mess: our cities are among the least dense in the world, meaning new developments are often at the suburban fringe of our sprawling cities.

The property lobby’s preferred "solution" to housing shortages is the release of more land on the urban fringe. It won’t work, because people don’t want to live that far out. Increasingly, they can’t afford to commute either. The reason is described by a well-known and much discussed theory of cultural geography known as the Marchetti Constant.

Cesare Marchetti is a Venetian physicist and geographer who has examined the structure of cities through history. Observing a simple correlation between city size and availability and location of transport, he argues that in "societies spanning the full range of economic development, people average about one hour per day travelling. This is the travel time budget."

This Marchetti Constant – which should perhaps be named after Yacov Zahavi, the World Bank transport researcher whose data Marchetti built on – determines the approximate structure of our cities. Seventeenth Century cities were small and walkable. Nineteenth Century cities added the railroad, expanding their city limits accordingly. The post-World War II city still provides for approximately similar commuting times but with a car – meaning our cities can be as large as 50 kilometres in diameter.

We’re now running up against the limits of this suburban expansion, as the era of cheap oil draws to a close. The rapid depreciation of house prices in the exurbs of American cities is one consequence of this; a similar plunge can be observed in Australia.

The relatively small number of houses that have been built is another strange quirk of the Australian housing boom. As Fiona Allon points out, this is probably because the ocean of cheap mortgage credit fleetingly available in the early 2000s was "simply capitalised into soaring house prices rather than leading to a wider and fairer spread of owner-occupation".

While housing supply cannot meet current buyer demand, that demand will likely slacken over the next few years as mortgage credit tightens or even dries up altogether. New supply, however, is likely to become available as investors eventually return to the market and demographic changes like baby boomer retirements take effect.

It’s well worth remembering, also, that by any fundamental measure, housing is massively over-valued in Australia. In every other rich nation that experienced a property bubble in the 2000s, the result has been a damaging slump as the bubble deflated – for example, in Spain, in Ireland, in the UK and of course in the United States. As economic forecaster Marc Faber noted last week on Lateline, Australia will be lucky to escape the same fate.

In these circumstances, housing will remain relatively unaffordable for some time, especially for low-income earners. The depressing reality is that Labor’s worthy but manifestly inadequate rental affordability scheme will make a difference only at the margins.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.

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