While the real estate industry and its dependants continue to trump residential property as an investment, many Australians are becoming increasingly frustrated with a growing lack of affordability of capital city housing. The problem is also spreading to the political sphere, with immigration levels and a distorted tax system starting to weigh on the Rudd government.

Despite an alleged housing shortage being blamed for the recent price rises and lack of affordability, statistics indicate that over the past two decades, only in one or two (recent) years have seen housing construction not keep up with population growth. Further, while median prices rose by more than 11% across Australian in 2009 (and by 16% in Melbourne), rental costs rose by less than 4%. If there really was a desperate housing shortage, that would be borne by rising rentals rather than merely increasing house prices.

The more likely reason for the worsening affordability of housing is due to Australians increasing use of debt and spending relatively more on their homes than ever before. The ratio of household disposable income to property prices has risen to six times in most capital cities — double the long-term average.

While this indicates that Australian housing is expensive (in relative terms) it doesn’t explain why Australians have been willing to pay more for housing than they did historically. In simple terms, Australians, more than anyone in the world, value owning their own home rather than renting a dwelling.

But why is this so?

There are obvious benefits to owning a home. Aside from the practical aspects of being able to tend to a garden and nail a plasma screen onto a wall, many people prefer the security and status of owning their own home. However, everything has a price — and Australians appear willing to pay an extraordinarily high one for those luxuries.

Delving more into the security aspect, this is where rental laws become relevant. Australian rental regulations are drafted heavily in favour of landlords, most notably, with respect to long-term rentals (like those often seen in Europe). For example, no matter how long a tenant has been residing in a property, if they no longer have a binding lease agreement, they can be asked to depart in 60 days should the owner wish to sell the property, or move in themselves. It is hard to make a rental house a home when you can be evicted in a couple of months.

Further, in Victoria, for example, if no lease is on foot, landlords are able to increase the rental amount every six months without offering the tenant a new lease agreement. Further, tenants can be evicted from the property, without reason, upon four months’ notice. As such, tenants have no security of tenure, and are captive to either constant rent increases or the substantial inconvenience of having to relocate to another property.

While these laws may not be so problematic in the event of a renter’s market (which is generally considered a vacancy rate higher than 5%), in the current market where vacancy rates can be a low a 1% in certain suburbs, they place tenants in an unenviable bargaining position, being forced to accept regular rental increases due to the hassle associated with relocating and the difficulty in finding alternative rental accommodation.

Rental laws are under the auspices the state governments, which have allowed the problem to escalate, while at the same time restricting planning, which increases the cost to develop new properties.

While changing rental laws would not be a cure for the housing affordability crisis, it would represent a key improvement to the desirability of renting (compared with owning). The most obvious change would be to provide additional protection for tenants to prevent landlords from increasing the rental without offering the tenant a new lease. This will provide tenants with a greater degree of certainty.

Another reasonable change would be to increase the notice periods before a tenant can be evicted depending on how long they have been a resident in the property (perhaps increasing it to one month per year they have been a resident). Terry Burke, professor of Housing Studies at Swinburne University, suggested an alternative range of reforms, including “greater access to longer leases of up to 10 years, US-style rent control and minimum quality standards for rental properties”.

Ultimately, a balance needs to be found between ensuring that landlords are able to achieve a satisfactory return on their investment and that renters are afforded a degree of protection to improve the desirability of renting compared with borrowing to buy a home. Until that happens, Australians will continue to pay far more than the intrinsic value for properties, worsening housing affordability.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey