If people think there’s a bubble, show them this

Can a frenzy of irrational buyers create a rental crisis? No.

Renters are doing it tough, it seems. That’s the word from The Department of Health and Human Services in Victoria:

Booming house prices and wage stagnation have been blamed for making rental affordability the worst it’s ever been in Victoria.

The Department of Health and Human Services (DHHS) collects data on the availability of affordable new housing for low income earners in the state. It’s now at the lowest level since 2000, when the survey began.

A decade ago, about 30 per cent of rental properties in metropolitan Melbourne were considered affordable for struggling families. Now it’s just 5.7 per cent.

Only 0.4 per cent of one-bedroom rentals are considered affordable for low-income singles…

“What we’re seeing is more people renting and renting for longer,” said Emma King, the CEO of the Victorian Council of Social Service (VCOSS).

“It’s for a range of reasons. One is we’re seeing an overheated housing market in terms of buying, so more and more people are locked out. They’re pushed into the rental market and they’re creating a much more competitive market in the private rental sector.

“On the other side of that we’re seeing people’s wages stagnating as rents are climbing, which is very much a toxic mix, and we’re seeing the impact of what is precarious work and unemployment…

Some are ending up in unsafe boarding houses, or living with multiple people in small apartments designed for only one or two people.

What’s more, there’s 35,000 people on the public housing waiting list in Victoria…

That’s a pretty compelling stat about the fall in affordable housing, from 30% to 5%.

And somewhere in the middle is a setting that just maintains speed. Where you’re cruising.

A shortage of housing exists when there are more people than there are homes. Pure and simple. It simply doesn’t matter whether people own or rent. A shortage happens when there are more people than homes.

So “rental stress” has nothing to do with house prices, and everything to do with an undersupply of housing.

And in Melbourne’s case, it’s an undersupply relative to population growth, which has been huge.

Last year, Melbourne added 140,000 people. That’s just in a single year.

There’s no way the housing stock is keeping up with that.

That’s creating a shortage of housing, and that’s what’s forcing up the price of rentals, and that’s what means that some people –¬†generally the poorest –¬†miss out and have to relocate further and further away from the city.

And so this goes out to all those people who say that housing is a speculative bubble.

If Australian houses prices were just about irrational buyers speculating and spending too much on property, you wouldn’t see any impact on the rental market.

Rents are set by renter incomes, nothing else. And so if Australia actually had a speculative bubble, you wouldn’t also see a rental crisis.

A rental crisis comes when there’s a shortage. And a shortage of housing pushes up rents, AND it pushes up prices.

And this is why affordability is such a big issue right now. People are desperate to buy but they can’t.

But why are they desperate to buy? Because there’s a shortage of housing and renters are stuck in a competitive game that is guaranteed to produce some losers.

And no one wants to lose out.

So before we start blaming buyers. Before we start blaming investors, or negative gearing or the ‘bubble’, come back and look at the fundamentals of demand and supply.

There’s too many people and too few houses.

It really is as simple as that.

Are you seeing a rental crisis where you are?

Spiro Kladis
Managing Director, Cashflow Capital

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Leave A Reply (2 comments so far)

  1. Cheryl
    1 year ago

    Exactly right – demand greater than supply always causes increase in price!!!
    But so called experts can’t see this and want to cut supply by stopping investors

    Unbelievable- Australia needs to look at Singapore model for low cost home ownership in capital cities

  2. Steveberry
    1 year ago

    Thanks for this amazing article…. Spiro!! keep it up..

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