Rental crisis to get worse before it gets better: Deloitte

Record-low vacancy rates, increased migration and a huge gap between housing demand and supply have combined to create a rental crisis that “will get worse before it gets better”, according to Deloitte.

Its latest economic briefing picked up on a report by the National Housing Finance and Investment Corporation last week that forecast a shortfall of 106,000 dwellings over the next three years and a huge need for “affordable housing”.

The NHFIC said its previous State of the Nation’s Housing report had predicted a construction drop-off in 2024, but “the surprise rise in inflation and interest rates in 2022 means this downturn has now been brought forward”.

“Slowing supply, together with increasing household formation, is expected to lead to a supply-household formation balance of around -106,300 dwellings (cumulative) over the five years to 2027 (and around -79,300 dwellings over the projection period 2023 to 2033),” the NHFIC said.

“NHFIC continues to expect a shortage of apartments and multi-density dwellings for rent over the medium term. Net additions of apartments and medium-density dwellings such as townhouses are projected to be around 57,000 a year (on average) over the five years to 2026–27, around 40 per cent less than the levels seen in the late 2010s.”

“NHFIC estimates that, conservatively, around 377,600 households are in housing need, comprising 331,000 households in rental stress and 46,500 households experiencing homelessness. Housing need across the country ranges from 208,200 households in highly acute rental stress to 577,400 households under less acute rental pressure.”

Deloitte said both increased demand and reduced supply of housing had been factors in the crisis.

“Demand is rising as population growth returns with force, driven by the return of international students and skilled/family migrants,” its economic briefing said.

“Capital cities have felt the return of international students more keenly, with many flowing into inner-city areas and university precincts. Regional areas are also grappling with higher populations migrating from cities, many of whom have remained post-pandemic.” 

It said the RBA’s decision to pause interest rate increases was a reprieve for mortgage holders, but renters had seen conditions get worse. Figures from real estate website Domain showed February rental vacancy rates at a record low of 0.8 per cent.

“A lack of supply of rental properties is also part of the problem. Rental vacancy rates are at record lows, which might normally prompt additional home building. However, new dwelling commencements are falling, given high interest rates and low confidence.”

A decline in average household sizes to the “lowest level in at least 25 years” was another factor and contributed to the formation of around 120,000 additional households.

RBA governor Philip Lowe said an increase in the average number of people per dwelling might reduce overall demand but would have little short-term impact.

“Even if this were to happen, it is likely that the balance between demand and supply in the housing market will result in rent inflation being quite high for a while,” he told the National Press Club last week, shortly after the RBA’s decision to pause rate rises.

“As rents make up 6 per cent of the CPI, what happens here can have a significant influence on overall inflation.”

On the supply side, the NHFIC report highlighted the rapid escalation of construction delays, affecting about 28,000 dwellings last year and the flow-on costs of uncertainty.

“NHFIC’s industry consultation suggests builders are making cost allowances of up to 40 per cent for unexpected delays, up from a more normal 20 per cent,” it said.

“In addition to higher interest rates, supply of new housing continues to be impeded by a range of factors, including the availability of serviced land, higher construction costs, ongoing community opposition to development and long lead times for delivering new supply.”

The report came shortly after two further high-profile company collapses in the sector, with home builder Porter Davis and community building constructor Lloyd Group just the latest in a rising number of insolvencies that add up to 1,864 so far this financial year, up 77 per cent on the same period last year.

Deloitte said it all added up to rents now rising at the fastest level in a decade, and ABS figures, which showed rents increasing 4.8 per cent for the year to February, understated the true position.

“Advertised rents, which measure rents on those properties changing hands (rather than on all rental properties), are up by 18.1 per cent in the year to March 2023 for units and up 9.4 per cent for houses.

“As more properties change hands and leases come up for renewal, average rental prices will also shift up further.”

“So, what now? Unfortunately, it’s likely to get worse before it gets better. There are long lags from new housing commencements to having additional housing available, and for now new commencements are still moving in the wrong direction.”

The Community Housing Industry Association described the NHFIC report as alarming and said it reinforced the need to finalise a package of housing reforms currently before the Senate.

CEO Wendy Hayhurst said housing and homelessness advocacy bodies had united on the issue because the need for a robust response to the crisis was “broad and overwhelming”.

“The status quo just isn’t working,” she said. “Everyone knows we need a new approach, backed with robust and growing funding, and a strong national housing agency to coordinate delivery. We are hopeful that the government and crossbench can reach a consensus swiftly because this crisis is urgent.”

The legislation package includes the Housing Australia Future Fund Bill 2023, which aims to invest $10 billion and use earnings of up to $500 million a year to build 30,000 affordable dwellings.

The CEO of National Shelter, Emma Greenhalgh, said the government needed to intervene because the private rental market was failing to deliver the right homes at an affordable price.

“The private rental market is brutal,” she said. “We are seeing people queuing around blocks for inspections and paying through the nose for the most basic accommodation. We need greater public investment and intervention to deliver homes to people who need them and we sincerely hope these reforms do not falter due to politics.”