High income earners stuck in a rent trap are exacerbating our rental crisis

Key takeaways

Higher income earners are being increasingly caught in a rent trap as property prices soar nationwide, and it's only worsening our rental crisis. The problem is twofold: higher rent prices mean higher income earners have to sacrifice more of their income to pay their weekly rental.

A study by Swinburne University of Technology found that people on very low incomes were forced to stay at home longer and pay rent to their family because they couldn't afford to live out of home. Meanwhile, there was a shortage of 348,000 affordable and available homes for lease.

The key issue is a supply problem, and governments can do a few things to increase the supply of rental properties.

At present lenders are stress testing investors at 3% above current interest rates, which means interest-only investment loans are being tested at 9% p.a., principal and interest, over 25 years. The benchmark interest rate must be reduced because a 3% buffer is no longer necessary if we are at the top of the interest rate cycle.

Aussies earning a higher income are being increasingly caught in a rent trap as property prices soar nationwide, and it's only worsening our rental crisis.

New data shows that in 2021, almost one-quarter of Australia’s renting households were earning an income of $140,000 or above, compared to 8% of renting households earning the same level of income in 1996.

The number of low-income earners in 2021 (households earning $39,000 or less per year) represented around 13% of Australia’s renters, compared to 60% of renters in 1996.

And today the data is expected to be even worse given that since 2021 the nation has plunged into a rental crisis with record-low vacancy rates and sky-high rental prices.

The problem is twofold

The study shows that, firstly, higher rent prices mean that higher income earners have to sacrifice more of their income in order to pay their weekly rental, delaying entry into the property market unless they have help from the bank of Mum and Dad.

Secondly, the proportion of renters on higher incomes who are able to meet higher rent expectations has pushed lower-income earners into housing stress due to a shortage of affordable rental properties - a trend that has been increasingly occurring since the study recorded data back in 2021.

Study author and Swinburne University of Technology researcher in urban and regional planning Margaret Reynolds told the SMH that having higher income earners in the rental market had made it much more difficult for people on very low incomes, meaning some were forced to stay at home with family or friends.

“People are staying at home longer and paying rent to their family because they can’t afford to live out of home,” Reynolds said. “It’s definitely a continuing problem for those on a lower income.”

Those living out of home were increasingly paying rents that were considered unaffordable – at more than 30% of their incomes.

In 2021, 82% of low-income earners were paying unaffordable rents in 2021 across Australia, while 90% were paying them in capital cities.

Meanwhile, there was a shortage of 348,000 affordable and available homes for lease, the study showed, with the biggest shortfall in Sydney, where an extra 72,200 properties were needed.

Melbourne followed closely with a shortage of 71,600 properties, while Brisbane (-37,200) and Perth (-20,500) also fell short for people on the lowest incomes.

In the regions, the Gold Coast had a 12,200 affordable-rental property shortfall, Newcastle lacked 8,800 and Geelong 3,500.

The study, which looked at historic census data, had only taken into account the market as it had been during COVID-19 before record-low vacancy rates first hit in 2022.

And the problem is even more dire today

Vacancy rates are currently at a record low of 0.8% for February, meaning competition in the rental market is rife which forces rent prices continually higher, exacerbating the problem even further.

“Unfortunately, the situation has not improved for lower-income renters since the census was taken,” Reynolds said.

“In 2022 rents began to increase substantially, leading to what many have termed a ‘rent crisis,’ as migration and mobility returned to pre-COVID levels placing additional demand pressure on the private rental market.”

The reality is that if you’re on a higher income without the bank of Mum and Dad to help buy your first property, you will be forced to stay in the rental market longer which in turn will only drive rent higher and availability lower.

Vacancy rates were relatively high across the country in 2021, as international borders remained closed.

But today rental vacancies have fallen to record lows across the capital cities, pushing up rents and making it difficult for tenants no matter their income.

How do we fix this issue?

The key issue is a supply problem, and the only way to increase the supply of rental properties is to encourage more private investors into the market.

There are a few things that governments can do to achieve that:

• Make sure rental laws are balanced by providing enough protection for renters whilst still giving landlords enough control over their valuable assets.
• Encourage more Australian mums and dads to invest in property and stop putting barriers in the way.
• Make it a little easier for investors to borrow.

At present lenders “stress test” a borrower’s ability to service a loan at 3% above current interest rates, which means interest-only investment loans are being tested at a rate of 9% p.a., principal and interest, over 25 years e.g., loan repayments on a $1 million investment loan would be $94k p.a. – almost double actual repayments ($56k p.a.).

The benchmark interest rate must be reduced because a 3% buffer is no longer necessary if we are at, or close to, the top of the interest rate cycle.

In the meantime, there is a window of opportunity for investors

While the current property market might not be attractive for investors right now due to high costs, government interventions, and a low supply of property for sale, it’s important to remember that property investment is a long-term game.

And I see a window of opportunity for property investors with a long-term focus right now.

The opportunity arises because consumer confidence is low at present, with many prospective homebuyers and investors sitting on the sidelines.

Sooner rather than later many prospective buyers will realise that interest rates and inflation have peaked with the RBA's efforts finally bringing it under control.

And at that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.

We saw an opportunity like this in late 2018-early 2019 when fear of the upcoming Federal election stopped buyers from entering the market.

And look at what's happened to property prices since then.

I saw similar opportunities at the end of the Global Financial Crisis and in 2002 after the tech wreck.

History has a way of repeating itself.

Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.

Now I'm not suggesting taking advantage of tenants, what I'm suggesting is to recognise there is currently a problem (lack of rental accommodation) and provide a solution.

Remember, the rental crisis is only worsening further, with no end in sight.

Now would be a great time to buy an investment property and enjoy high demand while trying to be a part of the rental crisis solution.

Maybe others might follow in your footsteps.

About Leanne Jopson Leanne is National Director of Property Management at Metropole and a Property Professional in every sense of the word. With 20 years' experience in real estate, Leanne brings a wealth of knowledge and experience to maximise returns and minimise stress for their clients.