Housing finance figures from the Bureau of Statistics confirm that investors continue to depart the housing market. Unlike earlier periods of investor disinterest, this time around owner-occupiers are also taking out fewer mortgages than they were a year ago.

Despite interest rates being at record lows, Australians aren’t choosing to to buy or invest in property nearly as much as they were doing just a couple of years ago, and that includes first-home buyers who usually would find this a more inviting market than during the boom times of the past few years.

The underlying problem is the unaffordability of Sydney housing. The NSW government has introduced a range of policies intended to assist first-home buyers to acquire a home, but these aren’t sufficient to enable would-be purchasers to take on the mortgages needed to convert them from tenants to homeowners.

Property prices across Sydney are easing, and that should mean younger Australians would find it easier to acquire property, but the size of the average mortgage is still increasing –about four per cent higher than at this time last year, and the introduction of new restrictions on borrowing have made it more difficult than ever for young families to buy a home of their own.

It’s not only owning a home that’s becoming harder. It’s also getting harder to find a rental property that fits within a household budget. Although rents in many parts of Sydney are falling, by as much as five per cent in some areas, the median rent for houses of $550 per week is simply beyond the reach of many lower and middle-income families.

Housing stress a factor

For low and middle-income earners who live in Sydney, housing stress has become a major concern. What is housing stress? It’s when housing costs take up more than 30 per cent of a household’s income, and when that household is among the bottom 40 per cent of income earners.

The latest Household, Income and Labour Dynamics in Australia (HILDA) survey shows the rate of housing stress in Sydney was 10.1 per cent between 2001 and 2004 and reached an all-time high of 13 per cent between 2013 and 2016. About one household in every eight is now enduring housing stress, whether they’re renting or buying their home.

Renters have been those most affected by housing stress. Across Australia, one in five low and middle-income renters are in housing stress compared with one in 10 of those with a mortgage.

A related survey finding was that the average mortgage burden on homeowners aged under-40 doubled between 2002 and 2014 leaving them especially vulnerable to rising interest rates.

The HILDA survey showed a sharp decline in the number of those under 45 years of age able to make the transition from tenant to homeowner. It also found that people living in flats had the highest rate of housing stress followed by people living in semi-detached houses; those living in detached houses had the lowest rates of housing stress.

The report’s co-author, Melbourne University’s Professor Roger Wilkins, told the Sydney Morning Herald’s Matt Wade that the rising rate of housing stress in Sydney is due to the long run-up in property prices: “House prices and, to some extent, rents have been rising relative to incomes,” he said. “That’s really the bottom line.”

Not surprisingly, Professor Wilkins said the decline in people moving from renting to home ownership was most pronounced in big cities like Sydney: “It’s very much connected to house prices, especially the rise in house prices relative to incomes,” he said.

Rental vacancies abound

There’s no scarcity of rental properties available across Sydney. In fact, the Sydney rental market is at its highest vacancy rate in more than a decade - almost 20,000 rental properties are estimated to be empty.

Data from property analysts SQM Research show that 19,572 residential rental dwellings are currently available for rent. The present vacancy rate of 2.8 per cent is the highest since SQM began keeping track of the data in 2005.

SQM managing director Louis Christopher summed up the situation for Domain’s Kate Burke: “There is now a greater supply of rental accommodation at a time when the growth in rental demand is probably falling a little,” Mr Christopher said.

This should mean good news for renters. There’s more rental stock after the recent boom in housing construction, and a there’s also a slight slowdown in population growth resulting from a reduced intake of migrants to Australia.

Property manager Anthony Cachia of Ray White Nolan & Iken, says those looking for rental accommodation face less competition than they did a couple of years ago: “There’s still a lot of people out there looking, but they’ve got a lot more choice now. Instead of having ten people looking at one property we’re having most often one or two that come through.”

St George Property Agents principal Michael Stojanovic said properties are taking longer to rent out than they used to: ““There are a lot of properties out there compared to eight or nine months ago,” he said. “Most of the time it takes a couple of weeks [to rent out a property], when once it would have taken a few days.”

For those interested in renting a prestige property, renting a house in some of Sydney’s most expensive neighbourhoods has actually become cheaper in the past year thanks to competition from newly-built apartments available on the rental market.

Renters in the city and east are now paying $60 less weekly than they were a year ago, and the median house rent in Sydney’s inner city has dropped 5.5 per cent year on year to $1,040. Rental costs year on year also fell for houses in the north west, northern beaches and upper north shore. However, rents rose higher on the edges of greater Sydney as houses in the city’s west, Blue Mountains and Central Coast all saw increases.

A growth in the number of Sydney rental listings over the June quarter was a key factor for easing prices, with the number of houses for rent up 6.9 per cent from the previous year, and units up 16.4 per cent – their biggest annual increase since 2012.

“We’re seeing building completions peak and seeing a lot of off-the-plan properties sold to investors [in previous years] coming onto the rental market,” Domain’s data scientist Dr Nicola Powell said.

Search for solutions

Affordable housing, even in greater Sydney isn’t an impossibility. Other cities around the world have faced the same or similar problems, and thanks to their efforts at finding solutions we have some options to consider.

Phil Ruthven AM, the Founder and continuing director of market research firm IBISWorld, believes the solution for Australia would be to adopt the leasing model common in Europe. This is a model which allows tenants to take out longer term leases – five to 10 years or more and gives them flexibility in how they fit out and use their homes.
 
“For years I’ve been advocating that it’s better to lease than to own a home — but I don’t mean renting, which is unstable, short-term and limiting,” he told News.com.au’s Alexis Carey.

“Less than half of people in Germany own their own home … because with leases you can paint the bloody house purple if you want; the owner might say to return it to the original condition at the end, but it’s a two-way deal with more flexibility.”

“Renting is very degrading, in a sense, compared to leasing,” he said. “We have to change our rental rules — they are backwards in Australia currently; it’s antediluvian.”

There are also concerns that the type of apartments now being constructed across Sydney won’t meet the needs of young families as they grow. Investor demand has seen apartment construction boom, but Angie Zigomanis from BIS Oxford Economics says the studio, one and small two-bedroom apartments that are attractive to Generation Y as they rent in their 20s are unlikely to hold the same appeal as they age.

“The large-scale, high-rise developments that sell apartments off the plan to investors do not hold the same appeal to owner-occupiers. Demand for medium-density housing is not as easy for developers to meet — apartment sites go up, but townhouse and villa-style developments require going out” according to Mr Zigomanis.

An answer at hand

In recent times housing has become an investment vehicle as much as a source of shelter. UK-based Places for People build-to-rent fund director Alexandra Notay says it’s important to understand this isn’t necessarily a good thing: “The baby boomer generation benefited from unprecedented house-price growth - they could basically guarantee that their house was going to double in value in a very short space of time,” she said.

“It’s getting people to understand that that is not the norm, that was a bubble in the housing market that is highly unlikely to reoccur. If you can give people security, so they know they’re not going to get thrown out or have to find somewhere else, they can get their kid into a local school, they can be part of the community,” Ms Notay said.

Sydney’s high property prices have made housing unaffordable for many, as both owner-occupiers or renters. But if governments and the private sector join forces there could be a way to provide the market with something close to the ideal.

Build-to-rent is the formula that could well unlock housing for those who presently can’t afford to buy or who find themselves severely stressed by expensive rents. It’s relatively simple in concept, but to make it financially attractive to investors will require a deal of private and public sector co-operation.

The Herald’s Carolyn Cummins explains: “CBRE research revealed that yields on build-to-rent investments would sit slightly above yields in the residential sector (2-3 per cent) at about 4.5 per cent. While this is an attractive return given the low-risk nature of build-to-rent, it is still low, and land tax will erode it.

“In a hypothetical model from CBRE, the impact of GST is quite significant and the internal rate of return (IRR) falls 99 basis points for both foreign and domestic investors.”

Build-to-rent aims to provide affordable, good-quality housing that suits the needs of low- to middle-income people who are now priced out of the owner occupier and private rental market. Within the build-to-rent model, investors, developers and governments work together to build high-quality apartments solely for the purpose of renting (or leasing) them out at an affordable price.

The model transforms housing into infrastructure that offers investors a long-term and low-risk investment opportunity. National Affordable Housing Consortium managing director Mike Myers told Domain that support from governments was important.

“I think the start-up stuff is going to be supported at a state government level, because their social housing systems are shrinking, home ownership is falling away, and they’ve got this major gap with the population boom going on, and they’re going to be the people accountable if they don’t fix it,” he said.

Expectations of infrastructure investors, unlike mainstream property developers, are based on long-term timeframes with stable returns and greater security. Toll roads, airports and seaports are some examples of this type of investment.

Investment bank Investec has entered the mostly-untilled field of affordable housing development in Adelaide with an 86-dwelling mixed-use project at Bowden, which offers for-sale and key-worker rental units. The scheme also allows key workers a discounted rental rate for up to three years while they save for a deposit to purchase their home.

Investec has now registered an interest in NSW’s ‘Communities Plus’ program to develop a 1.1-hectare residential precinct in Sydney's inner-city Redfern. The project at 600-660 Elizabeth Street anticipates a return of around half that sought by mainstream developers, but says the return is still acceptable.

"We are able to mitigate major project risks by working collaboratively with various layers of government," Investec Australia's infrastructure finance and investment team, Nils Miller, said.

A variant of build-to-rent – co-living, is also now available in Sydney. Hotel group Veriu is offering units in co-living property UKO in Sydney’s inner west, having 33 studios.  Another co-living property is being offered by Caper Property in an inner-city location.

Although new to Australia, co-living has been well-received in the US, Britain and Asia.
Co-living enables a number of renters to live under one roof. The real estate is owned a single landlord and the units are leased out over the long term. Domain’s Alison Cheung describes the concept:

“The property is typically an apartment complex with communal areas and also comes with services such as cleaning and laundry, as well as a host who organises group activities to foster a sense of community, all of which is included in the rent.”

In 2017 the NSW government began looking at a housing affordability plan that might enable people now locked out of the Sydney market to lease affordable housing on a long-term basis. Construction giant Mirvac has also been looking at this promising area for developers.

 "Australians are renting in greater numbers and for longer periods. With this evolution comes the need for greater housing choice, housing diversity and improved security of tenure for renters," Mirvac chief executive Susan Lloyd-Hurwitz told the Australian Financial Review.

"Build to rent can provide secure, quality, long-term and professionally-managed rental accommodation in key urban locations providing people with this choice and security,” she said.

Real affordability requires planning

The City of Sydney Council has a plan to create up to 3,600 affordable homes by the year 2030, but only if a new affordable housing levy is approved. The council currently has an affordable housing levy, but it only applies to new developments in Green Square, Pyrmont and the southern employment lands (the area between Sydney airport and the CBD).

Under the terms of the levy, a developer makes a contribution to affordable housing based on the total floor area of its development. The council has lobbied the state government to allow the City of Sydney to extend the levy, and if it is approved the council will phase in the changes by June 2022 to allow “the property market time to adjust”.

The levy is an attractive option for councils, as it is not an increase of development or density but ensures that a certain proportion of new development is affordable. As a Council spokesperson described it: “It’s not about more housing. It’s about built-in plans for affordable homes.”

In 2014 the NSW government announced a plan to sell property it owned in and around the Rocks area in Sydney. The funds raised were to be used to create a “fair social housing system” by building 1500 residences further away from the city’s central districts. Since that time the government has so far built 839 social housing units using those funds, with another 320 residences under construction.

These measures, and more, have been implemented with noble goals, but the waiting list for social housing increased from 57,000 persons to 60,000 in just the two years from 2014 to 2016. It now stands at 55,949 by the NSW government’s own statistics which are believed to understate the extent of the problem. 

A national housing plan was launched in March this year by an alliance of housing bodies, based on reforming Australia’s taxation system and using funds saved to develop affordable housing. Director of the campaign, Kate Colvin said that ‘rebalancing’ the tax system was the first step to fixing Australia’s “broken” housing system.

“We are calling on government to not only reduce the cost of housing tax concessions, but to also directly reinvest these savings into delivering the second part of our plan – increasing the supply of affordable rental housing,” Mrs Colvin said.

The plan envisages a national housing strategy including new investment to generate 300,000 new properties for social and Aboriginal housing. It also recommends a new tax incentive or direct subsidy to encourage private sector investment in 200,000 low-cost rental properties for low and middle-income earners.

Supporting the plan, Professor Julian Disney AO said the federal government needed to reduce the tax discount for capital gains and cut what he termed the “excessive” tax deductions for negative gearing. He also said that stamp duty on modestly priced homes should be removed too.

More apartments the answer?

About a third of homes in Sydney are now apartments, while detached homes have dropped to around 50 per cent. Townhouses and terrace houses account for the remaining 15 per cent. We know this because the 2016 census listed apartments at 30 per cent of Sydney’s homes, and since 70 per cent of new housing is now apartments, it’s estimated they have reached at least one-third of Sydney’s total dwellings.

One of the main drivers of the swing to apartment living, according to a study from McCrindle research, is affordability. The average detached house in Sydney is selling for $1.15 million while the average apartment is $710,000.

For several years the NSW government insisted that the solution to having more affordable housing would be to encourage the construction of more homes. This morphed into a virtual blanket approval for high-density apartment construction in and around major transport hubs across Sydney, with the state government taking over planning approval powers from local councils.

Although there’s recently been a bit of a pullback in approvals for new apartment construction, there are predictions of a return to new apartment supply later this year and in early 2019. Developers have suddenly become a bit hesitant to reveal their positions in a softer market than we’ve had over the past five years as apartment approvals have decreased and demand has slowed with the fading of the Sydney property boom.  However, property consultancy group Urbis says the reduced supply will be short-lived.

“I think it’s going to pick up,” said Urbis associate Director Alex Stuart. “What we’re seeing in the last three to six months is more activity, particularly in regard to transport corridors and development precincts around Sydney.”

Domain reports that across Sydney, 29 new projects – comprising 24,000 units – commenced in the March quarter, with 123 projects actively selling. The March quarter also saw 32 developments completed. These are now being marketed and prices have become more competitive, with the price of off-the-plan apartments on average dropping from $1,110,463 at the end of 2017 to $1,099,569 at present.

Pete Wargent, from Wargent Advisory, doesn’t agree with Urbis and says Sydney’s apartment supply won’t really begin to bounce back before the end of 2018: “I think it’s got a way to drop yet – from talking to industry contacts, it’s a lot harder to finance projects now,” he said.

He said that banks were more reluctant to lend money for development projects, and developers needed high presales for the builds to commence: “I wouldn’t say it’s particularly unexpected – it’s just part of the cycle. But the question mark for some developers is – if prices do start to decline for apartments. That’s when you see projects run into trouble.”

AMP Capital’s chief economist, Dr Shane Oliver, told Domain that future development was related to bank lending standards: “If buyers have trouble getting finance and prices do continue to slide, a lot of the development activity being talked about, and approved, might not actually come to fruition.”

“The problem with a spike in supply is that you can get indigestion problems – sales don’t occur, they pass in, properties sit around vacant for a while. That encourages developers to sit back until it clears – and that is probably what will happen here,” said Dr Oliver.

Experience has shown that no matter how many new apartments of the current variety are constructed, they have little or no impact on the affordability of housing. Developers continue to build apartments primarily to market to investors, and a ‘luxury’ tag is generally applied to promotions of their offerings.

The new apartments coming onto the Sydney market are simply not built to be affordable, whether they’re intended to be purchased by owner-occupiers or to be bought by investors so they can be rented out.

Dr Dallas Rogers, from the School of Architecture, Design and Planning at University of Sydney, told Domain’s Tawar Ragazhi there is a real need to turn around Australia’s housing affordability problem: “The forces that produced the housing affordability problem are structural, so I’m not surprised that housing affordability remains largely unchanged,” he said.

“We often see some movement in housing costs, the different buyer groups and rental costs and stock, but significant and lasting changes to the housing affordability problem will need strong government leadership and action taken over the long-term.”

Sources:

‘Tax regime hinders build-to-rent sector,’ Carolyn Cummins, Sydney Morning Herald, 4 September 2018
‘First Australian co-living properties set to open in Sydney,’ Alison Cheung, Domain, 29 August 2018
‘The housing market is cooling. But the affordability crisis isn't over,’ Greg Jericho, The Guardian, 26 July 2018
‘Housing stress in Sydney hits a new high,’ Matt Wade, Sydney Morning Herald, 31 July 2018
‘Rental vacancies in Sydney hit highest rate in more than 13 years: SQM Research,’ Kate Burke, 17 July 2018
‘Sydney apartment supply trailing off, but only temporarily: Urbis report,’ Nicole Frost, Domain, 7 June 2018
‘It’s a renter’s market’: Asking rents fall across pockets of Sydney,’ Kate Burke, Domain, 12 July 2018
‘City of Sydney could add up to 3600 affordable homes by 2030 if extended housing levy approved,’ Tawar Razaghi, Domain, 25 June 2018
‘Social housing sell-off ‘fails to fix growing NSW homelessness crisis’, Daniel Butkovich, Domain, 1 April 2018
‘Housing affordability slightly worsens over the December quarter: REIA report,’ Tawar Razaghi, 7 March 2018
‘Futurist and author Phil Ruthven on what‘s in store for jobs, housing and standards of living,’ Alexis Carey, news.com.au, 2 June 2018
‘How build-to-rent could solve Australia’s housing woes as first developments near,’ Jemimah Clegg, Domain, 3 July 2018          
‘Build to rent could fix Australia’s foreign investment, affordable housing problems: experts,’ Jim Malo, Domain, 30 May 2018
‘Sydney changing its look,” Chris Johnson, Urban Taskforce, Sydney Morning Herald, 12 May 2018
‘Shoebox apartments won't meet family-friendly housing demand as millennials come of age,’ Stephanie Chalmers, ABC News online, 3 August 2018
‘Infrastructure offers a solution to shortage of affordable housing,’ Nils Miller, Sydney Morning Herald, 23 June 2018
‘Investec ventures into affordable housing in NSW,’ Su-Lin Tan, Australian Financial Review, 5 April 2018