Are We Ready to Debate the Housing Crisis and Face Reality
5 min
ANALYSIS:
As the final-term Reserve Bank Governor, Philip Lowe, faced the House of Representatives Standing Committee on Economics last Friday, a sigh of relief was shared amongst mortgage holders that “the worst is over” regarding the fight against inflation. It only took 12 interest rate hikes to bring inflation at bay in the quickest contraction in monetary policy in Australia’s modern history. As many Australian mortgage holders are now tipping over the wretched mortgage cliff, we see signs within leading economic indicators such as retail sales, consumer business confidence and mortgage arrears, that there is much more pain to come.
To many people’s surprise, the economy has been incredibly resilient, despite stubbornly persistent rental and service inflation. Raising interest rates is unlikely to reduce these two lingering inflationary pests substantially. As further critical economic data comes to light, we believe the justification for further interest rises will soon abate.
At the same time, Australia’s largest trading partner, China, is experiencing the unthinkable ‘deflation’, which may have a contagion impact on our economy and prompt us to anticipate rate cuts sooner than we expect, leading to revisions in rate forecasts.
As the inflation storm clouds begin to settle down, we can assess the damage caused, especially concerning ongoing cost-of-living crises, inequitable wealth distribution, rental crises and falling labour productivity.
The Structural Problem
The most significant casualty is the housing market, specifically its ability to supply sufficient housing to keep rents stable and improve affordability. At the peak of the interest rate cycle and property unaffordability, it is economically strange that property prices are bucking the trend and have increased 9% from the trough to its current heights, reinforcing that something is fundamentally wrong with the housing market.
The first glaring issue in our current structural problem is rampant rental growth. CoreLogic’s latest July figures confirm annual national rental growth at 9.4% p.a. In the months ahead, there will surely be a vibrant, albeit distressing, public debate examining perhaps one of the biggest threats to our economy and quality of life: the dreaded ‘Housing Crisis’.
Our current Prime Minister, Anthony Albanese, will no doubt attempt to unify the states and territories to find an appropriate, balanced solution to ease the rental crisis and increase the supply of properties as he goes into this week’s cabinet meeting.
Rental Market and Rent Freezes
Sydney, and Australia more broadly, grapple with a clear rental crisis as we observe low vacancy rates (0.9%) and soaring rents.11 With 31% of Australians being renters,12 these issues impact a large, vulnerable demographic, who feel the full impacts associated with cost-of-living pressures. This is playing out not only as an economic issue but as an ongoing social issue that warrants immediate attention from politicians.
11 Vacancy rates: August 2022 (domain.com.au).
12 Housing statistics in Australia: home ownership & rent | Savings.com.au.
13The ACT is the only territory to limit rent increases but tenant groups say gaps in protection leave tenants vulnerable | The Canberra Times | Canberra, ACT.
14 https://www.abc.net.au/news/2023-08-11/asx-markets-business-live-news-philip-lowe-rba-inflation/102716942.
As a result, many people across the political spectrum propose rent control as a solution. However, such measures may backfire, as seen in ACT.13 As Philip Lowe recently made clear, rent control could be a short-term solution to improve housing affordability; however, in the long-term, such a solution will prove inadequate as the fundamental structural problem of low housing supply will persist.14
This is because a cap on rent increases would discourage property development and investment, leading to a lower supply and higher rents in the long-term, as observed in San Francisco and Ireland.15 These rental rules burden property investors as they are not given a reprieve from an increase in mortgage repayments and holding costs, which will drive much-needed investment away from the property sector.
When it comes to increasing supply, property developers and investors are the essential lubrication that enable the property machine to function. Therefore, even rumours of
additional tax for property investors is enough to spook and jeopardise the pipeline for much-needed developments, which is already significantly insufficient to meet current demand.
As Philip Lowe echoed his view on this matter at the parliamentary committee, government interventions in the rental market via rent freezes and caps have immediate short-term gains. However, it does not resolve long-term structural problems and only exacerbates these issues in the future.16
The key to addressing the crisis lies in increasing the housing supply. Government inefficiencies, especially with regard to planning systems, stifle progress. Efforts to aid homebuyers through subsidies, which has been a popular policy in the past, can also inadvertently drive-up housing prices.
Why has so Much Gone so Wrong so Quickly
There has been a long history of housing stock deficiency in Australia; we need to build enough property to meet demand, especially since the immigration reprieve experienced during COVID-19 lockdowns is slowly fading away. Once international borders reopened, net migration skyrocketed, with future forecasts migration and total population growth remaining elevated.
This is placing further pressure on our fragile construction industry, which has experienced a once-in-a-lifetime perfect storm. This is especially so for builders operating within the residential sector, who are locked into fixed-price contracts, and have dealt with construction costs flying up by 30%-40%, La Niña (a climate pattern leading to greater rainfall in Australia), supply chain issues, rising interest costs, labour shortages, as well as COVID-19 lockdowns and disruptions, whilst on thin margins. Unsurprisingly, ASIC data shows 1031 construction companies falling to the liquidator’s knife – more than anytime experienced over the past decade.
Project Feasibility
Traditionally, many medium to large-scale development projects take 3-6 years to obtain necessary approvals, then a further 8-12 months to obtain construction certificates. This is followed by off-plan marketing campaigns to get enough sales to meet financiers’ requirements even before the first shovel hits the ground. Not to mention it also takes time for councils to consider re-zoning.
Construction costs over the past three years have skyrocketed by 30-40% due to inflation and labour shortages within the sector. Land values typically remain constant and do not provide room for adjustment. This has resulted in many approved projects being shelved as developers wait for property prices to increase enough to compensate for construction costs, holding costs and greater demand for purchasers to buy off-the-plan.
Ultimately, the supply component of the property market is driven by the private sector – an army of mum-and-dad investors to established property developers. Unfortunately, making money on property projects is at one of its most challenging times in decades, further contributing to the challenge of providing property supply to the system.
Planning and Rezoning Process
We also want to avoid knee-jerk, desperate planning outcomes as well as unnecessary rezoning of more farmland and urban sprawl, which have only been short-term fixes to the underlying problem of inadequate supply; however, in most cases, this does not generate net gains as the benefits are outweighed by government spending and immense costs on infrastructure projects.
It takes 4-8 years for councils to consider large-scale rezoning projects properly. Nevertheless, we should look at best practices and improve the bureaucratic red tape to avoid future property price and rental increases; however, make no mistake – there is no quick fix.
Solutions to the housing crisis will involve all levels of government coordination, patience, well-measured policies, and a deep understanding of the delicate balance between different stakeholders’ interests.
In short, the housing crisis is here to stay for several years. We will continue having to talk about it and lay blame to governments, developers, builders, and investors. The government’s job is to make the planning system more efficient, promote property development and investment, and let the market deliver supply based on demand.
Ultimately, market forces will result in property prices remaining elevated and, over time, property will attract capital once the perceived market risk normalises. We should then see the necessary supply to meet demand.
Msquared Capital is a private credit provider with investment opportunities backed by quality property along the Eastern Seaboard; we ensure that all investment opportunities are based on risk-to-reward as our core offering and performance. Mortgage funds perform well during volatile times, and capital preservation is regular, with a reliable monthly income that gives our investors peace of mind.
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Australia’s housing market defies forecasts as prices surge past pandemic-era benchmarks.
First-home incentives can still form part of a long-term investment plan if used strategically.
3 min
Australia’s home prices continue to grow, and while that makes them great investments, they are also some of the most unaffordable in the world.
That’s why first-home buyer schemes such as the First Home Owner Grant, the First Home Guarantee, and stamp duty concessions have become so valuable.
These programs are designed to reduce upfront costs and fast-track people into homeownership.
But the question many aspiring investors are now asking is can these schemes be used as part of an investment strategy? These government initiatives aren’t designed for investors, but they can still play a key role in your long-term investment journey if used strategically.
What the schemes actually allow
Every first-home buyer incentive in Australia is created to support owner-occupiers, not investors.
Whether it’s a cash grant, reduced deposit requirement, or a stamp duty discount, the catch is always the same in that you must live in the property for a set period of time. For example, the First Home Owner Grant often requires you to live in the property for at least six to twelve months, depending on the state.
The First Home Guarantee allows you to purchase with just a 5 per cent deposit without paying lenders’ mortgage insurance, but again, you’re required to live in the property for at least one year.
Likewise, state-based stamp duty concessions are only available for properties intended as a principal place of residence. If your intention from the outset is to buy a property solely for rental income, you won’t be eligible. However, if you’re open to living in the property initially, then transitioning it into an investment, there’s a path forward.
A strategy that works
Rentvesting has emerged as one of the most practical ways for first-time buyers to take advantage of these schemes while also laying the groundwork for a property portfolio.
The concept is simply, buying a property in an area you can afford (using the first-home buyer schemes to assist), live in it for the minimum required period, and then rent it out after fulfilling the occupancy condition.
This approach lets you legally access the benefits of first-home buyer schemes while building equity and entering the market sooner. Instead of waiting years to save a full 20 per cent deposit for an investment property, or getting priced out altogether, you get your foot in the door with reduced upfront costs.
Once you’ve satisfied the live-in requirement, the property can become an income-generating asset and even serve as collateral for your next purchase.
What to look for in a rentvestment property
If you plan to eventually convert the property into an investment, you need to think beyond your short-term living experience. It’s essential to buy a property that performs well both as a home and as a long-term asset.
That means looking at key fundamentals like location, rental demand, and growth potential. Suburbs with strong infrastructure, access to employment hubs, good transport links, and low vacancy rates should be high on your list.
A balanced price-to-rent ratio will help ensure manageable holding costs once the property transitions to an investment.
Established low-density areas often outperform high-rise apartment developments that flood the market with supply and limit capital growth. And ideally, your property should offer scope for future improvements, whether that’s a cosmetic renovation, granny flat addition, or potential to subdivide down the track.
Mistakes to avoid
There are a few common missteps that can undermine this strategy. The first is selling too soon. Some grants and stamp duty concessions include clawback provisions if you offload the property within a short period, which could see you lose the benefits or even owe money back.
It’s also a mistake to let the lure of a government handout sway your purchasing decision. A $10,000 grant doesn’t justify compromising on location, growth prospects, or property fundamentals.
Another pitfall is failing to consider the financial impact once the property becomes an investment. Repayments, tax treatment, and outgoings may change, so it’s important to stress-test your position from day one.
Lastly, beware of buying into oversupplied areas simply because they’re marketed to first-home buyers. Not all new builds are good investments. If hundreds of identical properties are being built nearby, your long-term growth could be seriously limited.
With the right approach, your first home can be the foundation for an entire property portfolio. It starts with using available government support to lower your entry cost.
From there, you occupy the property for the required time, convert it to an investment, and leverage the equity and rental income to fund your next purchase.
Many of the most successful investors today began with a single, strategically chosen property purchased using these exact schemes. By buying well, you can turn your first home into the launchpad for long-term wealth.
Abdullah Nouh is the Founder of Mecca Property Group (MPG), a buyers’ advisory firm specialising in investment opportunities in residential and commercial real estate. In recent years, his team has acquired over $300 million worth of assets for 250+ clients across Australia.
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