There's a crisis in the housing market -- and it's not about mortgage rates and property prices. Renters are increasingly squeezed into tiny places with unaffordable rates, writes market analyst Catherine Cashmore.

Australia has a growing generation of residents who not only can’t afford to buy, they can’t afford to rent either.

They’re the oft-forgotten “rental sector” lost amid an abundance of market commentary devoted to the “good news” on falling interest rates for mortgage holders, endless “forecasts” of growth for potential property investors and renovation mania that is set to hit the country again as we enter the year’s annual ratings war full of obsessive real estate reality shows.

Despite reports assuring buyers that housing affordability has improved and the persistent and poorly assessed claim that it’s cheaper to buy than rent in an increasing number of suburbs (the methodology of which I argue against), the percentage of people requiring rental accommodation is fast gaining pace. For the past five years or so, yields have been rising at phenomenal rates — by and large outpacing both wage growth and inflation for the same period.

The insistence from various commentators that the steep rise in rental prices will push increasing numbers back into ownership fails to consider that inflated yields coupled with erosion of interest on long-term deposit accounts has all but cancelled out any perceived benefit for a large proportion of “would-be owners”. Consequently, they often have no choice but to lodge with family or friends as they transition through the various stages of job changes and property moves.

Currently, roughly 30% of Australia’s housing market is made up of renters. The 2011 census data indicated median rises in rental prices rose sharply over the five-year interim, with Western Australia tipping the scales with an increase of 76% over the corresponding period. The number of owner-occupiers has been slowly diminishing, and the proportion of renters priced out all together is increasing.

Australia’s owner-occupancy rate, which once sat at 71.4% in the mid to late 1990s, is now at 67% and forms part of a slow decline in which families with children in particular seem to be suffering. The decrease of ownership for this demographic has fallen from 79.5% (2006) to 77.2% in 2011 — and considering the low activity in the market of late, it’s fair to suggest the downward trend is set to continue.

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Other reports presented late last year suggest that had ownership percentages stayed at the same level as that recorded in the 2006 census, we’d have welcomed an additional 34,000 into the property market. As it is, despite the 6.1% “peak to trough” fall in the national median house price and flat prices in most capital city markets throughout 2012, sales turnover over the past two years has been woefully low — back at levels not seen since the late 1990s.

It’s easy to palm off the figures as a result of low consumer confidence. But as the latest Fitch ratings report on residential mortgages pointed out, Australia is still the “least affordable housing” worldwide — and it’s nothing to be proud of.

The trend is not localised. In the UK the owner-occupancy rate is at its lowest level since 1988, with 64.7% of the population now classified as “owner-occupiers” and the proportion of people renting rising from 31 to 36% over the preceding 10 years. This is despite a recent British Social Studies Survey that indicates 86% of tenants (social included) still foster a strong desire to “own their own home”.

In light of its financial woes the US is of course no different — their owner-occupancy rate is at a 15-year low, with roughly 65% of the population now classified as owner-occupiers and a rental sector that is straining under the pressure of inflated yields and increased demand in capital city locations.

“Is it any wonder reports of ‘crowded houses’ — with three or more families sharing accommodation — rose nationally by 64% to 48,499 in the last census?”

In fact, across all property markets that have historically boasted high owner-occupancy rates, the rise in the number of homeless people is strengthening as the vicious circle of trying to save for a deposit in a fiscal environment while servicing high rental prices keeps residents well and truly “stuck” — often in accommodation that is not adequately suited to their family’s needs.

A comment (one of many) from a would-be home buyer on Australians for Affordable Housing’s Facebook site last week summed it up perfectly: “Well I can’t afford to rent let alone buy (and the) stress … is literally [a]ffecting my health.”

A closer look at exactly what it costs to rent a modest apartment within commutable proximity to our capital cities is truly eye-opening for anyone who may have been out of touch with the market of late. In the most recent quarterly bulletin wrapping up the year for 2012, RP Data noted that Perth in particular is feeling the strain, with an increase in yields of 12.8% for houses and 10.6% for units, and vacancy rates as low as 1.6%. According to APM, this is an increase of $70 per week over the 12-month period, leading Premier Colin Barnett to single out rental prices as the “biggest cost-of-living pressure facing Western Australians”.

Darwin currently has only two rental properties listed on realestate.com.au for under $300 per week — one of which is a rusty old corrugated iron shack that would look more at home in a “shantytown”. The median rent in Darwin is $600 per week.

Students in Queensland have described the market under $300 “war like”, and as for Melbourne and Sydney it all comes down to the standard of accommodation you want to call home. In Melbourne, if you’re halfway fussy — perhaps requiring good proximity to transport, a modest balcony, or internal floor space over 40 square metres — you’ll be hard pushed to get a one-bedroom apartment in original un-renovated condition under a minimum of $350 per week. In Sydney, the equivalent will cost between $450 and $500 per week — which is hefty chunk for any average wage earner. To give some idea of the condition of apartments currently for rent at the above prices, this is an interior snapshot of the kitchen in one such apartment I inspected last week in an inner suburb of Melbourne. I think it paints the picture perfectly …

Students, singles and childless couples can often make do with less space to compensate for the luxury of being close to the city or walkable distance to both transport and shops. However single mothers, low-wage families, retirees or disabled tenants understandably require something a little more substantial than a one-bedroom flat to adequately fulfil their basic needs. They’d be hard pushed to find anything suitable for less than $500 per week unless they move to the outskirts of the capital city. And due to poor public transport facilities in many fringe locations, such a move simply isn’t feasible for a large majority of renters — though many are forced in that direction.

Is it any wonder reports of “crowded houses” — with three or more families sharing accommodation — rose nationally by 64% to 48,499 in the last census? Furthermore, other data from the ABS shows from 2009-10, 42% of renter households received some form of housing assistance, once again emphasising the growing crisis in this sector of our marketplace.

Pressure on the rental market is unlikely to ease in the near to far future. The ABS estimates almost two-thirds of “new residents from overseas” are long-term property renters — this is compared with half new residents from “within Australia” who now class themselves in the same bracket, which is a robust figure in itself.

Economic conditions such as wage growth, unemployment, consumer confidence and frequent changes of work placements all reduce the likelihood of a strong owner-occupier market over the next decade. Current policy is built around the general assumption that renting is a “step” on the road to ownership — but it’s fair to suggest unless the trend takes an about turn, tomorrow’s generation will hold a growing percentage of residents for which renting is “for life”. We need to consider their welfare.

No one should be fooled into thinking private rental accommodation is affordable accommodation; residential investors are looking for strong yields and solid returns. In a heated market, vendors will understandably go for as much rent as they can achieve (regardless of tax benefits and lower interest rates, which are rarely passed onto the tenant.)

The National Rental Affordability Scheme, which was designed to go some way in bridging the “affordability gap” for low income workers sitting on the rental ladder is also flawed in its design. When the scheme was first initiated in 2010, the AHURI analysed the project to assess the overall impact in easing affordability — only 40% of applicants using the accommodation had fallen below the 30% “housing stress” benchmark.

It’s vital we start to steer policy towards the creation of a fairer partnership between owner and renter: longer terms of tenancy, protection from exorbitant rent rises, enforcement of basic standards of accommodation (in both the private and public sector) and a greater partnership between tenant and owner — which could even envisage the tenant taking on more responsibility for the basic maintenance of their “home” in return for a secure rental plan ensuring a longer term of permanent tenancy (five to 10 years) for which rent does not outpace the growth of inflation. Other models of assistance, including housing co-operatives, should also be assessed.

The benefit an investor can gain from a happy tenant should not be underestimated. Property — even when maintained through an experienced property manager — is not a hands-off experience. Unlike a share certificate you can file away and forget about — the value of any residential property (whether letting or selling) derives from its lasting appeal as a “home”. Ensuring there’s enough money left over from the initial acquisition for ongoing maintenance is vital — and a long-term happy tenant should never be undervalued.

There is much that needs to be done to assist the ownership of affordable accommodation, but creating a stable market terrain for tenants is equally important and needs an overhaul of current policy if we’re to do so. Without it, the number of people seeking government-assisted accommodation will escalate to greater proportions, and the untapped potential of a growing number of residents struggling to make ends meet will hamper advancement of the overall economy.

*Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. This article was first published at Property Observer.