Chapter 4The cost of living crisis in housing
4.1Australian households are facing significant cost of living pressures on all fronts. Compounding many Australians struggling with their energy bills, as set out in the previous chapter, the committee received compelling evidence on a crisis in housing, which this chapter considers.
4.2The evidence in this chapter augments evidence set out in the First Interim Report, and should be read in conjunction with it. The First Interim Report set out evidence on how housing affordability for both buyers and renters is increasingly a challenge for many Australians, and made the following findings:
Finding 8: Housing costs, both in terms of rental and mortgage costs, are a major contributing factor to the cost of living crisis.
Finding 9: Greater supply and reforms to domestic policy settings are required to adequately address the need for additional housing, including community and social housing.
Growing pressures in housing
4.3Over the two years to February2022 prices rose to record highs, with home values rising by 25 per cent and rents by 12 per cent. This translated to a growing burden on Australian household budgets, with housing costs identified by the Reserve Bank of Australia (RBA) as the largest primary driver of recent rises in the Consumer Price Index (CPI), growing at a much faster rate than food, recreation and culture, consumer durables and transport.
4.4According to Federal Government figures, Australia is experiencing a shortfall of 106000 new homes. The Government’s projected levels of immigration will exacerbate this shortfall. As the Institute of Public Affairs (IPA) noted in its submission:
The 2023-24 federal budget has confirmed that net overseas migration to Australia will be 715,000 in financial years ending 2023 and 2024, and 260,000 after 2024. IPA analysis finds that the increased migration intake will contribute to Australia’s housing shortfall of 100,900 over the next two years and a cumulative shortfall of 252,800 between 2023 and 2028.
4.5Since the committee’s Interim Report, the cost of housing and the pressures it exerts on household budgets has continued unchecked. The Finder Cost of Living Gauge suggested in January 2024 that the financial burden on Australians was still extreme, with housing a major component:
62% of mortgage holders cite mortgage stress as a key financial concern, an increase from 61% last month.
38% of homeowners are facing difficulty covering their housing expenses, marking a rise from the previous month’s 35%. Similarly, 44% of renters are still encountering challenges in meeting their rent payments, consistent with the previous month.
4.6Interest rates have risen sharply over the last two years—13 times since May2022—has led to intense stress placed on mortgage holders, many of whom have struggled with relentlessly lifting repayments.
4.7Research from the Australian National University from 2023 suggests that there is a record number of Australians under mortgage stress, with almost half (48.5per cent by the end of 2023) paying at least 30 per cent of their income to service their loans, a rise from 26.7 per cent from 2019.
4.8In October 2023, a Roy Morgan poll suggested that a record high 30.3 per cent of Australian mortgage holders (1.57 million people) were at risk of mortgage stress in the previous three months. In the survey period, the RBA interest rates went unchanged, holding at 4.1 per cent, suggesting that incremental pressures on mortgage holders are increasing even in periods of rate stability.
4.9Concerningly, Roy Morgan found that:
Over 760,000 more households at risk of mortgage stress after a year of interest rate increases
The number of Australians ‘At Risk’ of mortgage stress has increased by 766,000 since May 2022 when the RBA began a cycle of interest rate increases. Official interest rates are now at 4.1% in October 2023, the highest official interest rates since May 2012, over a decade ago.
The number of Australians ‘At Risk’ of mortgage stress (1,573,000) is at a record high. The proportion of mortgage holders at 30.3% remains below the record highs reached during the Global Financial Crisis of 15 years ago because of the larger size of the Australian mortgage market today. The record high of 35.6% of mortgage holders in mortgage stress was reached in mid-2008.
The number of mortgage holders considered ‘Extremely At Risk’, is now numbered at 1,043,000 (20.5%) which is now significantly above the long-term average over the last 15 years of 15.3%.
4.10Similarly, an unprecedented rise in usually steady rental rates over the COVID-19 pandemic, combined with an undersupply of properties available, has brought increasing stress to the many Australians who rent. Of the recent monthly ABS Monthly Consumer Price Index Indicator data for housing, rents have continued to remain around 7 per cent movement over the last year.
4.11As the First Interim Report of the committee noted, rental affordability declined over the 2020–22 pandemic, with rents lifting for urban householders to 28 per cent of their income, and a record high of 34 per cent for regional renters. Simultaneously, vacancy rates reached its lowest ever point on record of 0.8 per cent—a drop from 1.5 per cent a year earlier.
4.12The Salvation Army’s May 2023 At Breaking Point report found that:
27% of all respondents were behind on their rent, mortgage or board payments
Among those with arrears, 51% were behind by up to two weeks, and 78% were behind by up to four weeks
35% of private renters reported finding and maintaining a safe and affordable place to live, as well as almost facing homelessness, as one of their greatest challenges of the past 12 months.
4.13Alongside the cost pressures outlined above, it was noted in evidence that homelessness had increased by 20 per cent over the last decade, with many Australians excluded from affordable housing by rapidly rising house and rental prices.
4.14Population increases are exacerbating the challenges. The number of people competing in the housing market is increasing significantly faster than the delivery of new supply. Net overseas migration was around 549 000 people for the year ending September 2023, a figure described by the Centre for Population as 'historically large'.
4.15As recently as February 2024 net permanent and long-term arrivals reached a record high of 105 460. This is the first time net monthly permanent and long-term arrivals have exceeded 100 000. This is 19 per cent higher than the previous record of 88 810 in February 2023.
4.16In contrast, housing construction approvals in February 2024 were 12 520, equivalent to 12 per cent of net permanent and long-term arrivals in the same period.
The effects of the housing price crisis
4.17These trends were also apparent in the committee’s survey, which noted housing was a very significant contributor to the cost of living crisis. A large number of responses outlined struggles people were facing with lifting mortgages, such as:
My children have had to re-prioritise spending to be able to cover rising mortgage costs and increased educational costs with one grandchild starting High School and another starting school this year.
Rising interest rates adding hundreds to my repayments… I have had to refinance my mortgage, I am behind on my rates.
My wages have not kept up with rising food costs and now my mortgage increased from a low fixed rate to a high variable rate has meant I am paying hundreds of dollars more every week.
Utilities increasing and the take home pay of ordinary people is not enough to fuel the rising cost of everything. Rent and Mortgages being the primary ones.
Rising house prices, rising interest rates sky-rocketing our mortgage repayments… What is scariest, is that only some of our mortgage is currently variable, with the rest due to come off the fixed rate in April 2024. We will not survive when that day comes if interest rates are still this high.
The mortgage increase and cost of groceries has really meant we’ve had to cut everything back.
I was able to not pay my mortgage for six months to give me breathing space… [cost of living pressures have been] stressful for my daughter who is 25 and wants to move out but scared of rental market.
Our mortgage increased by $2500 per month, so we can’t afford travelling anymore and we have to cut cost of many items and only buying necessary groceries, no restaurant… currently our priority is paying mortgage, also thinking to find a second job (like uber driver) at night. But this means we will have less time together as a family.
4.18Similarly, many renters also told the committee how they were struggling to keep a roof over their heads:
My mum has been a single mother her entire life, as well as a renter. Due to her level of income…she's never been eligible for any benefits and 99%of her pay goes to rent. During the lockdowns, she was stood down from her position and obviously still had to pay rent. We are still trying to recover from this and often times don't have enough money for bills and rent, my younger brother and I have begun contributing with our part-time jobs.
My rent has increased by $80 per week so this means I have had to cut down on my groceries and pay as much as I can on my other bills.
My daughter's rent went up $150+ a week. Great mental strain on them to make ends meet. Stress and mental anxiety.
I’m on an age pension and finding life tough. I had lived frugally on a disability pension a few years ago prior to age pension and was able to pay rent and manage things a lot better than l can now.
I may have to move back to my parent’s house (as a university graduate at 28 years old with a full time job and no dependents) as I can’t find an affordable rental at this current market rate.
Can't afford fresh food, living off basics like pasta and noodles to afford rent. Not being able to afford healthcare like doctor’s appointments (no bulk billing for a person who works), medicine and other things like [counsellors]. Have to reprioritise basics needs just to pay rent. And I earn a normal wage.
I have to live with my parents as I can not move into a share house with my 3 [year old] daughter, no one would take us. My relationship fell apart when we couldn't find a place to live that was affordable. I had just managed to finish studying and the rent went up 50%.
Potential levers for Government
4.19In the federal system, the majority of levers to deliver greater supplies or land and houses into the market and put downward pressure of prices rests with the state and territory governments. However, the committee considered evidence on a range of potential solutions to ease the housing price crisis, some of which could be done in partnership with or incentivised by the Commonwealth, which will be discussed in turn:
increasing the supply of housing stock, including working with states and territories to remove red tape and prohibitive zoning restrictions;
instituting rent freezes or price caps, or restrictions on short-stay rentals; and
assisting first home buyers into the market, including through access to superannuation.
Increasing housing supply
4.20The committee was interested in testing whether the most viable solution to the lack of housing affordability across Australia ultimately lies in increasing the supply of housing stock.
4.21In May 2023, the then-Governor of the RBA, Mr Philip Lowe, commented that a failure to build enough homes to keep up supply was 'one of the biggest challenges' facing Australia, and had contributed significantly to the massive climb in rents over recent years. He attributed this shortfall in housing to inflexible zoning and planning regulation, both in state and local government, which he saw as a difficult thing to change because of 'vested interests'.
4.22Evidence to the committee generally reflected this view. The Real Estate Institute of Tasmania called for an increase in housing construction numbers, claiming, 'it’s quite simply the lack of supply which has been manipulating the economics around rent prices and house prices'. Foodbank’s Chair, MrStuartClutterbuck, told the committee at a hearing that ' [w]e need more housing now'.
4.23The Tasmanian Small Business Council (TSBC) pointed out that unpoliced red tape and approval delays were adding to business costs and were increasing overheads, including for affordable housing development. TSBC Chief Executive Officer, Mr Robert Mallet, stated that 'overregulation results in a loss of productivity, and the many paying for the possible failures of the few'.
4.24The committee heard that available housing was often inappropriate for certain groups. Dr Maria Belen Yanotti from the University of Tasmania told the committee:
…one of the issues is not only the amount of housing stock in itself but also the diversity in stock. There are not enough different types of housing to satisfy the different household sizes and the creation of household sizes. A lot of the housing stock that is there then becomes unaffordable for some types of households because there’s not enough variety in the housing stock.
4.25Housing Industry Australia (HIA) argued that 'excessive and unjustified infrastructure levies' acted like 'a tax on new housing which impedes supply and reduces housing affordability'. It recommended that the Government work with jurisdictions to address this, as well as to build good data to encourage more construction of new homes.
4.26Master Builders Australia (MBA) agreed with this perspective:
Right now, there are obstacles in place which are preventing many of the homes we need from getting built. The homes that do end up getting built are often delayed by the many barriers encountered on their journey to final completion, including unnecessary planning impediments and the lengthy approvals process. These factors, plus taxes and the accumulation of financing costs suffered during the development and building process, substantially inflate the final cost. Heaped on top of all this are additional taxes paid by the buyer of new homes, like GST and stamp duties at the time of purchase. Taking all of this together, it is not difficult to see how homes end up being so much more expensive than they could be.
4.27MBA encouraged a range of strategies the Government should consider to address the current housing shortage. This included working with jurisdictions to oversee charges they imposed on markets and ensure they were proportionate, cap planning fees and charges, and 'ramp up' Commonwealth incentives and penalties for housing outcomes delivered through the Federal Financial Relations system.
4.28In answers to questions on notice, HIA proposed four steps for the delivery of a greater number of new housing projects:
First is to stop taxing new home building. The tax imposts placed on new homes through infrastructure charges or tax-like measures such as introduction of new and complex building regulations inhibit supply without providing any net public benefit.
Second is to attract more investment, especially towards apartments. Tighter macroprudential regulations have resulted in a decline in owner-occupier lending, which has restricted lending particularly to first-home buyers and those with less than a 20 per cent deposit. Punitive taxes on foreign investment have resulted in the withdrawal of overseas investors which were key to increasing dwelling supply during the apartment boom. Proposals to force domestic investors out will also not bode well for increasing housing supply and will only result in exacerbating the cost of renting.
Third is to improve capacity. The residential building industry has undergone cyclical capacity problems during the pandemic, with supply shocks resulting in an increase in materials prices. This has largely dissipated as global supply chains eased. The industry’s bigger and structural problem is with labour shortages due to the difficulty obtaining overseas skilled workers and competition with other civil works for labour.
Fourth are stable and reliable economic settings. The industry has been subject to boom-bust cycles recently, with closed borders followed by a catch-up cycle in migration. Population growth is important for the economy in helping offset Australia’s ageing population, restoring the budget balance, supporting economic growth, and easing labour shortages. Absent stable population growth and economic settings, however, the industry would struggle to keep up with housing demand, which does not bode well for housing affordability.
4.29Both MBA and HIA called for better data on the future residential building pipeline in Australia. MBA commented that the absence of good information makes it 'more difficult to know whether progress is being made over time' on affordability and supply, and made it harder to identify urgent areas for action.
Rent freezes and limiting short stay rentals
4.30One of the options canvassed regarding bringing down costs for renters is controls on the amount of rent landlords are able to demand, sometimes known as rent freezes or a cap on rental properties.
4.31However, compelling evidence considered by the committee suggested rent control and freezes had been 'an unmitigated failure' wherever they had been tried around the world. The Real Estate Institute of Australia Director, MrAdrian Kelly told the committee:
….the reason why [rent control has not worked] is that, despite good intentions, potentially, this type of legislative control ended up knocking confidence out of the market. We had fewer property owners wanting to buy investment properties for us to rent. We had property owners selling rental properties and reducing supply again. So here we are now, coming out of COVID, and a lot of rental property owners lost a lot of money during COVID… It's not a pandemic now; now it's interest rates. I know that there's a marked slowdown of most markets across Australia right now, particularly around people buying rental properties. Why would you buy one at the moment when you don't know what the rules are going to be?
4.32This supports evidence that the committee is aware of on rental caps. As noted in the First Interim Report, Ms Antonia Mercorella, CEO of the Real Estate Institute of Queensland–where rental caps have been proposed, has commented that restrictions on price 'innately discourages further supply' of housing. Although she supported adequate protections for tenants, she stressed that this should be done without prejudicing supply.
4.33Additionally, the committee notes that in the ACT, where rent controls prohibit raising rent by over 10 per cent of the Canberra-specific CPI for tenants, that the policy has not worked. Since its introduction in 2019 to mid-2023, rents grew 14per cent, faster than the national average over the same period of 4.6 per cent.
4.34Analysis by the Productivity Commission, provided in its submission to the Senate Inquiry into the worsening rental crisis in Australia provides further details. It found that ‘rent control is not an effective way to improve affordability for renters’, and advised ‘Governments should avoid policies that artificially depress rents and curtail the supply of new properties’.
4.35The Productivity Commission also found that rental control caused market distortions that could negatively impact renters in the medium and longer term, stating:
Rent control can create other rental market inefficiencies. Landlords might neglect maintenance because they have little incentive to provide a positive experience for renters. Rent control can also create mismatches between renters and their properties (they may be in a wrong-sized property, or too far from work), because the people benefiting from rent control cannot move without losing access to cheaper rent...
4.36The committee was also interested in the effects of the growth of short stay rentals. Ms Eirene Tsolidis Noyce, an Organiser for the Renters and Housing Union, outlined her observations in Tasmania:
We know that Tasmania has had a huge issue with the fact that there are fewer and fewer affordable rentals, but also that short-stay accommodation furthers the lack of properties available for people. Anything that is modelled on a short stay is going to further the insecurity of housing for people. From that perspective, Airbnb is not a place to live and it's not a place to call a home.
4.37However, others were not convinced that short stay rentals had affected the market too much, and that it would be difficult for interventions to achieve success. Ms Cath Hart, the CEO of Real Estate Institute of Western Australia, told the committee:
The Real Estate Institute of Australia released a report on short stay a few weeks ago that did a bit of work on this. Airbnb and short-stay dwellings represent about 0.4 per cent of the Perth market and about 1.7 per cent of the market in regional WA. So it's quite a small portion, and I don't think you're going to tax people back into the long-stay market, particularly in a state like Western Australia, where what we see is that FIFO workers, who go up on swing, might put their property onto the short-stay market whilst they're onsite. If you change the settings around that, you're not necessarily going to see them go, 'Okay, that's going to go on to the long-term rental market'—similarly for farmers who might maintain a residence in the city that they put on the short-stay market when they're on their stations. My general view is you won't tax people back into the market. You might, instead, actually just see the prices of that accommodation increase by whatever the amount of the tax is that's been implemented.
4.38The Productivity Commission also considered short term rentals in its submission to the Senate Inquiry into the worsening rental crisis in Australia, noting that short-term rentals highlight, rather than cause, supply issues in rental accommodation. Its submission stated:
…constraining the short-term rental sector could have negative economic consequences. Cheaper and more accessible tourist accommodation benefits travellers and increases tourism activity, providing employment opportunities and extra income for residents.
Access to superannuation for a first home deposit
4.39Evidence to the committee saw a link between more accessible and affordable home ownership on one hand, with lower rates for renters on the other. One option canvassed was allowing first homebuyers access to part of their superannuation to use as a deposit on a home.
4.40The MBA saw some benefit for first homeowners being given early access to up to $20 000 for a deposit, on the condition it was returned to their account on sale of the property.
4.41Some respondents to the committee’s cost of living survey also raised the importance of first homeowners being able to access part of their superannuation early, which they directly linked to existing cost-of-living pressures.
Committee view
4.42Housing is among the most significant contributors to the cost of living crisis Australians are facing.
4.43In the run up to the 2022 Federal Election, Labor committed to lower cost of living, building 1.2 million homes, and delivering cheaper mortgages for Australians. All three of these commitments have failed to materialise. Other indicators are concerning. The current rate of first home buyers is now at its lowest levels in over a decade. Mortgages are lifting to levels that are crunching household budgets. Rents have risen to unprecedented highs. Approvals are down, but population is trending upwards increasing the housing shortfall gap.
4.44This is a great concern to the committee, especially as the Government does not have an adequate plan to address the current crisis in home ownership and in the rental market, and shows no sign of acting to curb the level of migration to reduce demand pressure.
4.45More Australians should be able to achieve the dream of home ownership through more affordable mortgages and first home deposits, and those who lease able to rely on reasonable and stable rental prices.
4.46The committee received evidence on several potential policy options targeting housing costs. Of these, the most compelling was the introduction of new supply into the housing market. Evidence suggested that greater supply would make it easier for more Australians to buy, stabilise prices, and make sure more availability lowers costs for rental accommodation.
4.47The committee accepts that this starts with reform at the state and territory level, but leadership must be shown at the Commonwealth Government level. The Commonwealth Government has the fiscal levers, through its payments to the states, to incentivise outcomes.
4.48Rental caps, as proposed by some stakeholders, act as a distortion on markets. These kinds of interventions by governments in housing act only to confuse and dissuade investors, lift rents, raise costs, or for investors to leave the market, which decreases supply.
4.49It is only supply that can sustainably address this crisis in housing. Australia simply does not currently have enough existing housing to meet its current and future needs, and the Government does not have a credible plan for a pipeline of housing stock to meet future requirements.
4.50The Australian Government should start to work to increase housing supply as a matter of great urgency. To do this, the committee considers that the Commonwealth should work with states and territories on improving the policy and regulatory settings around housing.
4.51This should consist of work to encourage states and territories, alongside local governments, to remove barriers in planning and zoning regulation and policy, to deliver greater supply of housing.
4.52Finally, the Commonwealth should also make it easier for first homebuyers to save a deposit to enter the market. The rising costs of mortgages has made it prohibitive for many, including younger Australians, to save a deposit.
4.53At this unique moment in time when there are Labor governments in every state and territory jurisdiction on mainland of Australia, the Prime Minister must use his authority within his Party, as well as through National Cabinet, to align state and federal objectives and actions, and to urgently release housing supply.
4.54The committee considers that first homebuyers should be able to access their own money to assist them purchase their own homes, as set out in the Coalition’s First Home Super Buyer Scheme. This would accelerate people’s ability to enter the property market and achieve the dream of home ownership, without impacting their retirement savings.
4.55The committee recommends that the Australian Government works with the states and territories, and local governments to remove planning and zoning barriers to delivering greater housing supply. The Government should consider setting clear targets and key performance indicators to be achieved if incentive payments are to be included as part of this strategy, and withholding incentive payments until completed houses enter the market.
4.56The committee recommends that the Australian Government works with state and territory governments to reduce or remove housing taxes such as land taxes, windfall gains taxes, and other developer charges to reduce the cost of new houses.
Recommendation 12
4.57The committee recommends that the Australian Government support and legislate the Coalition’s First Home Super Buyer scheme, to allow Australians to access their own money to buy their own home, without impacting their retirement savings.