21 Feb. 2007

Rental crisis

I must say that Ross Gittins' article today does what I asked someone to do back in January and explains the rental squeeze very concisely.

Gittins' article is strange however in pretending to be predictive when it's really post hoc: He starts be proclaiming that rental increases will be the big housing story this year. However, this is manifestly already the case, despite the fact that the increases haven't yet – i.e. there are a raft of speculative media pieces claiming that there will be big rental increases, scare stories essentially, based on the low occupancy figures. Of course, it's entirely reasonable to say that low supply will lead to price rises, and so price rises do seem to be on the cards. The question is why the supply is lower. Gittins really offers two explanations: overall population growth and formation of new households.

I can't find growth figures for Sydney for 2006, but they've been around 40,000 a year for several years, an increase of below 1%. This is not insignificant of course if enough of it's being dumped on the private rental market. In recent years, housing stock growth has been well in excess of population growth, closer to 2%. New house building has of course collapsed since 2005, due to the stagnation in property prices. Assuming new household formation at a constant rate this does indeed imply a serious squeeze on rental accommodation. I think there can be no doubt that the essential problem is that new houses are not being built. This is meaning that new households are buying up existing properties (thus stemming the decline in house prices, and removing houses from the rental market) and moving onto the rental market itself, squeezing supply. So essentially the problem, if there is one, is simply one of supply and demand. The evidence we have of high demand and low supply, namely low rental vacancies, itself seems to imply population growth outstripping the supply of housing (and possibly to an extent people at the higher end of the income scale demanding ever more space, such that apartments that previously housed families may now house a single yuppie, etc.). The thing is that the population growth in Sydney is not necessarily going to remain steady forever. Indeed, higher rental prices are in themselves something that my tend to curtail both demographic increase (people will wait till they can afford the space to have a baby) and migration (people will be less likely to come to Sydney and more likely to leave). The lack in new housebuilding itself undermines the construction sector which is incredibly important to Sydney's economy, employing 250,000 people directly, and this may also certainly affect population growth.

The obvious solution is to produce more accommodation, rental or otherwise, preferably in the public sector to house those who can least afford private rentals. Howard instead ponders additional rent assistance out loud, surely a disastrous idea that would simply tend to raise rents even further, although it is true, as Gittins points out, that high rents will themselves stimulate construction. The non-socialist Kevin Rudd actually denies that there is a 'silver-bullet' solution to the rental crisis, which is simply untrue – there are in fact several, including government investment in public housing and rent controls.