Chapter 5Housing
The impact of interest rate and rental price rises
5.1This chapter provides an overview of the housing and rental markets in Australia, discusses the key dynamics affecting housing affordability, and sets out some of the evidence received by the committee on potential solutions to housing affordability.
Housing affordability
5.2The committee heard evidence that housing affordability (that is, the price of living in housing—the rent or mortgage—as well as running costs) is becoming an increasing challenge for many Australians.
5.3Over the two years to February 2022, home values rose by 25 per cent and rents rose by 12 per cent to record highs.
5.4Australia's housing market is roughly divided into thirds: one-third of households rent; one-third own their home outright; and one-third are mortgage payers. Around 4 per cent of households live in social housing.
5.5Dr Michael Fotheringham from the Australian Housing and Urban Research Institute (AHURI) told the committee that the proportion of outright owners is shrinking, whilst the proportion of households who rent is growing. This is a new phenomenon, he said, which is 'choking' the system with an insufficient supply and driving up rental costs.
5.6Dr Fotheringham told the committee that Australia faces a challenge maintaining a 'sufficient supply' of housing stock. He stated that the COVID-19 pandemic was an additional contributing factor, as construction of new houses almost ground to a halt due primarily to supply chain issues, workforce shortages, and rising material costs.
5.7The Renters and Housing Union (RAHU) submitted that 50 out of every 10000 people in Australia are homeless—an increase of 20 per cent over the last 10 years. The Salvation Army stated that it had seen a rising number of Australians becoming 'excluded' from affordable housing, increasing the risks of homelessness. Similarly, Mission Australia observed that it had seen demand for housing and homelessness services increase by more than a quarter (26percent) over the past two years, stating:
The stark shortage of social and affordable housing, skyrocketing cost of renting and rental stress, rising cost of living, and inadequate levels of income support are combining to escalate Australia's housing and homelessness crisis.
5.8Reverend Stu Cameron, told the committee that the number one issue reported by Wesley Mission's frontline staff was housing affordability and availability. He emphasised the role that interest rates were playing in the issue of housing affordability:
I think there is a future where fixed interest rates come off and mortgage stress will deepen further. We anticipate that the crisis we're seeing now will just deepen through 2023.
5.9Dr Cassandra Goldie, Chief Executive Officer of the Australian Council of Social Services (ACOSS), also told the committee that housing affordability had become a 'chronic problem' in Australia.
5.10People with Disability Australia (PWDA) noted that one in six Australians have a disability, over half of whom (56 per cent) rely on income support payments as their main source of income. PWDA submitted that rising costs of living disproportionately affect people with disability, and noted that people with disability also face sizeable additional costs associated with their disability.
5.11Dr Fotheringham told the committee that housing is the largest cost for most households. He reported that Australia has a 'real under supply of social housing' and had far lower levels of public and community housing than most comparable jurisdictions.
5.12Mr Joel Dignam, Executive Director of Better Renting, drew a strong connection between housing affordability and energy affordability:
When housing costs more, people end up in poorer quality homes. They often have higher power costs. This doesn’t just mean that they're paying more for energy; it often means that they're cutting back on energy altogether, which can mean that they're in quite unhealthy indoor temperatures. This is a big concern with heat waves and also in winter.
Mortgages and interest rates: homeownership
5.13The value of mortgage debt in Australia has been growing steadily over the last decade, rising from over $1.2 billion in 2011 to over $2 billion in 2021. Two-thirds (67 per cent) of the value of mortgage debt is held by owner-occupiers, with the rest (33 per cent) attached to investors. Evidence from RAHU suggested that outright owners own increasing numbers of properties—increasingly four or five properties.
5.14Australian mortgages are predominantly variable rate mortgages—that is, a rate that fluctuates over the life of the loan, usually correlated with the cash rate (that is, the rate at which the Reserve Bank lends to commercial banks; see also Chapter 2). Historically, less than a fifth (20 per cent) of home loans have been fixed-rate loans in Australia, in contrast to New Zealand and the United States where fixed rates account for more than 90 per cent of all loans, or the UnitedKingdom, where more than 80 per cent of mortgages are fixed.
5.15The dominance of variable mortgages in Australia means that increases in the cash rate may be quickly passed on by banks to customers in full. This increases the speed and impact of monetary policy changes, but may leave some consumers particularly vulnerable—particularly recent borrowers and first home buyers. One analyst summarised the Australian context as follows:
In contrast to most other nations where most loans are long-term fixed-rate products, the pass-through of monetary policy in Australia directly hits almost every single borrower in the short term.
5.16In March 2022, a study into housing affordability by CoreLogic and the Australia New Zealand Banking Group found the ratio of housing values to household incomes to be a record high, with housing values being 8.5-times household incomes (indicating reduced housing affordability). Changes were particularly pronounced in regional areas over the two years of the pandemic, where property prices were found to have risen 'substantially more than incomes'. Nationally, the value-to-income ratio was found to be around 4.5 in 2001.
5.17In response to rising inflationary pressures from early 2022, the Reserve Bank Board increased the cash rate target at each of its ten meetings from 0.1 per on 6April 2022, reaching 3.6 per cent on 8 March 2023—a record run of rate increases. The Reserve Bank Board paused its rate rise increases at its 5April2023 meeting, maintaining the target rate at 3.6 per cent (see also Chapter2), although the Governor noted in his public statement that further rate tightening remained likely to ensure inflation returned to target.
5.18In October 2022, the Reserve Bank acknowledged that the combined effect of rising interest rates and high inflation had 'placed some strain on household budgets'. Whilst the RBA determined that households, in aggregate, are 'reasonably well placed to adjust to a period of higher interest rates', it nevertheless cautioned:
About 8 per cent of borrowers would completely drain their mortgage prepayments within months if the official interest rate rises to 3.6 per cent in the next year, even if they slashed their discretionary spending by 80 per cent.
5.19Chairman of the Australian Prudential Regulation Authority, MrWayne Byres, told the House of Representatives Economics Committee in October 2022 that the minority of borrowers who are on fixed rate loans (usually on one to three-year terms) are likely to face 'significant repayment shock' in 2023 when their fixed rate loans expire and they are forced to refinance at higher rates.
5.20Dr Marion Kohler from the RBA told the committee that around a third of outstanding housing credit was fixed rate, but that around half of that was due to 'roll off' as variable rate loans during 2023, affecting around $350 billion of credit and over 800000 loans. She stated that the Bank 'does not target house prices'.
Figure 5.1End of fixed-rate mortgages periods, four majors, 2023-2024
Source: Australian Banking Association, Submission 40, p. 5.
5.21Anglicare Australia warned that lower income households would be particularly affected by increases in the cash rate, telling the committee:
…many households' budgets are already strained by increasing costs and will be unable to absorb the extra [mortgage] repayments. More people will fall into financial hardship and be forced to make choices about turning on the heater this winter or skipping meals. Others risk defaulting on their mortgages.
5.22The Consumer Action Law Centre submitted that mortgage arears had become the second most common issue facing their clients.
5.23Dr Fotheringham told the committee that part of the cause of the lack of affordable housing in Australia stemmed from the 'financialisation' of housing:
From one lens, housing's main purpose is shelter; it's a roof over your head; it's a home. But it is also a financial asset, an investment vehicle. And in many ways policy settings have favoured the investment vehicle over the shelter, so tax settings that are favourable for investors ahead of owner-occupiers or renters have enabled the commodification, the financialisation of housing in a way that's fuelled increased prices.
5.24Mr Dignam similarly described the 'commodification' of housing, telling the committee that whilst housing used to be about providing a decent environment for people to live, it had become an 'asset class' or commodity to 'inflate the wealth of whoever is lucky enough to own it'.
5.25Mr Chris Ellis, Chief Executive Officer of Finder Australia, told the committee in February 2023 that rate rises would increase a typical variable mortgage by around $10000 per year. Evidence from the Australian Banking Association subsequently suggested the figure was around $1000 per month. Research commissioned by Finder found that more than one-third (34 per cent) of respondents said that they struggled to pay their home loan—an increase from 17 per cent less than a year and a half earlier. Additionally, nearly one-in-eight (13 per cent) of respondents reported having missed a mortgage repayment in the last six months, and 6 per cent reporting having missed more than one.
5.26Finder's research found that one in five mortgage holders felt that they had borrowed too much on their home loan, with generational differences also apparent, in which younger respondents were more likely to feel under pressure.
5.27Finder also told the committee that rate rises were having a 'knock-on impact on the rental market', with its research showing the number of people reporting that they struggled to pay their rent increasing from under a third (30 per cent) in mid-2021 to 42 per cent in January 2023.
5.28The Salvation Army also noted the linkages between mortgages and rents:
The rental, investment, owner occupier, and social housing markets are not isolated, with different consumers and quarantined demand. They exist on a continuum along with all forms of accommodation, and interrelate to one another. Changes in the affordability and availability at any point along this continuum, have impacts upon the system as a whole.
The rental market
5.29A 2019 report by the Productivity Commission found that low-income private rental households (some 615 000 households) were facing rental affordability challenges. The study found that in 2017–18, two-thirds (66 per cent) of low-income households spent more than 30 per cent of their income on rent; one-quarter (24 per cent) spent more than half their income on rent; and 7percent of low-income households spent over three-quarters (75 per cent) of their income on rent.
5.30Rental affordability declined during the pandemic, particularly in regional areas. By March 2022, households in regional Australia were required to pay a record high of 34 per cent of their incomes to service rent, compared with 28percent required for renters in capital cities.
5.31By October 2022, the national vacancy rate had reached its lowest point on record at 0.8 per cent—down from 1.5 per cent a year earlier, and representing the sixth consecutive month of declines in the number of rental listings. These dynamics were reported to be exacerbating a national rental crisis.
5.32The October 2022 Budget forecast that rental costs would continue to increase considerably through to the end of 2024 due to population growth and limited housing stock. On 6 December 2022, the RBA Board also forecast that renters would face 'further large increases in rents' over the coming years.
5.33Dr Fotheringham noted that the proportion of people who are renting for ten or more years has continued to grow, as has the number of people who reach retirement age who are still renting. He told the committee that this was a particular problem as 'our retirement income system is largely predicated on an assumption that you have an asset of a house'.
5.34Dr Fotheringham attributed some of the pressure in the rental market to short-term letting, in which properties may be reserved for higher-value short-term rents, thereby effectively reducing the stock of housing.
5.35Anglicare Australia noted that the average weekly rent had risen by nearly 20per cent over the past year, submitting that renting a home in the private market was 'completely unaffordable for people on government incomes'.
5.36RAHU described the impact of cost of living pressures on renters, as follows:
Compounded growth in costs of living, housing market and interest rate rises are exorbitantly inflated by the real estate industry and pushed down onto the lowest socio-economic populations, who are the least economically stable both in assets and employment.
5.37RAHU submitted that rents had risen by 8.7 per cent during 2022; more than four-times the rate of wage growth at 2.1 per cent.
5.38Ms Eirene Tsolidis Noyce from RAHU warned that rents had risen by 20percent in regional Victoria and as much as 50 per cent in the outer suburbs of New South Wales; 'rents have risen across the board at the highest rate in history', she claimed.
5.39Ms Tsolidis Noyce acknowledged that landlords were facing escalating mortgage rates, but noted that rent rises had increased by 295 per cent from January to April 2022.
5.40Mr Zachary Doney, also from RAHU, told the committee that rental prices were 'getting out of control', warning that those who are most vulnerable to rental price increases are 'terrified' of being made homeless, and therefore often unlikely to challenge rent increases.
5.41Mr Doney submitted that, tenancy laws tend to favour owners over renters, and many renters 'are bouncing from place to place and having to pay increasing [rents] while other costs increase'. He warned that RAHU was seeing a significant increase in incidences of very short-term leases being offered by default—sometimes as short as three or six-months.
5.42In December 2022, tenant advocacy organisation, Better Renting, reported that there were over 700 000 energy inefficient rental properties in New South Wales, costing tenants an average of $2700 each year to heat and cool, and consequently compromising the health of renters—particularly the young and the elderly.
Evidence on potential solutions
5.43The committee heard evidence on three broad areas of potential solutions to housing-related cost of living pressures:
increasing the supply of housing;
policy and legislative interventions; and
increasing social transfers.
5.44Each is discussed in more detail in the following section.
Increase supply
5.45The committee also heard that interventions are needed that increase the supply of housing. Dr Fotheringham, for example, called for a national construction program to address the overall stock of housing.
5.46The problem of stock was also raised by Master Builders Australia, which noted:
Right now, there are obstacles in place which are preventing many of the homes we need from getting built. The homes that do end up getting built are often delayed by the many barriers encountered on their journey to final completion, including unnecessary planning impediments and the lengthy approvals process.
5.47The Property Council of Australia told the Committee:
Reform of unproductive state planning systems, greater supply of properly zoned brownfield and green field land, as well as improved housing diversity through emerging asset classes such as Build-to-rent housing, Retirement Living Communities and Purpose-Built Student Accommodation must factor in the national housing solutions mix.
5.48It also noted that 'to make housing supply meet community needs, we will need to align and incentivise all three levels of government for best practice planning and meeting housing targets'.
5.49Master Builders Australia proposed a number of measures to address the lack of housing supply, including:
releasing more Commonwealth and state/territory land for development of housing;
further leverage foreign investment housing;
tying Commonwealth payments to the states/territories to their progress in reforming planning regulation and property taxes; and
expanding the stock of new homes in regional areas so that migrant labour inflows can be accommodated more readily.
Policy and legislative change
5.50The committee heard evidence that policy interventions and legislative reform are required to reverse the current pressures on housing affordability. For example, Mr Dignam proposed rental law changes that would limit the rate of rent increases that owners could impose during a year. Ms Fiona Caniglia, Executive Director of Q Shelter, similarly called for policy changes that reduce the frequency of rent increases. Ms Karen Dare, Chief Executive Officer of Communify Queensland, supported proposals for allowing only a percentage increase in rents, telling the committee that rental caps are also needed. She called for strengthened tenancy laws that would provide a higher degree of permanency among other rights for renters.
5.51Anglicare Australia also called for stronger protections for tenants, arguing that both '[n]ationally consistent protections and uniform tenancy legislation' were needed.
5.52Mr Doney called for caps on rents, whilst Ms Tsolidis Noyce described rent control as 'a central part of the solution to the cost of living crisis' and 'one sure-fire way' to create affordable housing. More specifically, MrDoney argued for policies that would peg the national rent price index to the median wage index and also called for legislation to limit rent increases to a maximum of once in 12months.
5.53Rent caps have recently been proposed by the state government of Queensland, prompting strident critiques from stakeholders. The Real Estate Institute of Queensland CEO Antonia Mercorella said the imposition of rental caps 'innately discourages further supply'. She cautioned that balance was required in any tenancy legislation to ensure that adequate protections were in place for tenants without discouraging investment in supply.
5.54RAHU recommended a number of other measures that would improve the stability of tenure, including providing funding to incentivise landlords to provide longer-term leases, and implementing stronger protections for renters.
5.55Q Shelter argued for a national poverty reduction strategy which includes measures to address housing affordability. She also recommended that policies be developed that encourage people to let properties on the long-term rental market as opposed to short-term leases.
Fiscal measures
5.56Some evidence presented to the committee also indicated a need for fiscal interventions to address housing affordability. Dr Fotheringham called for increased Commonwealth rental assistance for low-income households. He told the committee such rent assistance would ultimately save the taxpayer, not cost them, arguing; '[Australia spends] more leaving people homeless than we would housing them'.
5.57RAHU and the Salvation Army both called for increased Commonwealth assistance for renters by broadening welfare eligibility, raising the rate of payments, and tying rent assistance to inflation, among other recommendations.
5.58Mr Dignam advocated that the Commonwealth should finance energy efficiency improvements for social housing to reduce both energy costs and demand for energy. He also told the committee that minimum energy efficiency standards are needed for rental properties. DrDina Bowman from the Brotherhood of St Laurence also called for measures to offset growing energy stress faced by the most vulnerable, including 'a large-scale energy efficiency upgrade program that provides tiered support depending on people's level of need and ability to pay'.
Interim committee findings
Finding 8: Housing costs, both in terms of rental and mortgage costs, are a major contributing factor to the cost of living crisis. Finding 9: Greater supply and reforms to domestic policy settings are required to adequately address the need for additional housing, including community and social housing. |