Renters are more vulnerable than mortgage holders to financial risks and stress, according to the March 2023 Bulletin by the Reserve Bank of Australia.
The report said the average and median incomes of renter households are generally lower than owner-occupiers across all age groups.
However, the proportion of private renters who are in the top half of the income distribution seemed to have increased over time. This means that a higher share of private renters that was able to get land on better paid jobs has increased.
Still, renters on lower incomes tend to spend a larger chunk of their incomes on basic living expenses, which means they have lower levels of spare cash flow relative to those who have a mortgage. Renters also have a lower savings buffer.
“In combination, these factors can make renters more vulnerable to increases in the cost of living and make it more difficult for these households to accumulate wealth over time, compared with owner-occupier,” the RBA said.
Rising rents
A crucial contributor to the vulnerability of renters is the tightening of the rental markets.
After increasing early in the pandemic particularly in the cities like Sydney and Melbourne, vacancy rates have continually declined to crisis levels over the past years.
At the same time, rent inflation has picked up pace over the past year.
“Advertised rents, which provide a signal of rent increases when a property is rented out to new tenants, have grown more strongly than the entire stock of rents and finding a suitable rental property has become more difficult,” the RBA said.
While the average rate of increase in rents over the past decade has been relatively weak, the past year saw the strongest consumer price index reading for rent in 10 years — in 2022, the index for rents increased 4%.
It is worth noting, however, that growth in employment income and income support was able to help renters offset the impacts of rent rises.
However, financial stress for some renters has picked up over the past year.
“Renters are younger, move more often, and have lower incomes and lower wealth. These characteristics can make renter households more vulnerable to rising rents and broader cost-of-living pressures,” the RBA said.
Shifts in rental demand
One thing to consider is the shift in demand trends over the years.
During the height of the pandemic, people preferred more space and to live with fewer people, which led to the average household size declining to its lowest level in at least a quarter of a century.
“The decline in average household size since the start of 2020 – around 1 per cent – is estimated to have contributed to around 120,000 additional households being formed and, as a result, additional demand in the rental market,” the RBA said.
Renters also turned to smaller capital cities and regional markets, where people, who usually move to larger cities, remained as the work-from-home trend gained traction.
This led to the significant increases in regional rents between 2020 to 2021.
The slowing supply is another critical component — growth in apartment construction has significantly moderated, and this is vital as about half of the supply of apartments are rented out.
Apartment construction is expected to be subdued over the next few years, even with the return of international migration. The reason? It would be the higher interest rates and construction costs, combined with declining housing prices and apartment presales.
“The tightness in the rental market and the strong growth in rents that has occurred since the onset of the COVID-19 pandemic will have contributed to a deterioration in rental affordability and an increase in financial stress for some renter households,” the RBA said.
-
Photo by @astreyas-photo on Pexels.
