Why a surge in high income renters points to bigger problems

Eleanor Creagh
Eleanor Creagh

High income earners are squeezing lower income earners in the rental market, highlighting the urgent need for more affordable housing.

The latest research on the subject clearly illustrates the trend – higher income households are far more prevalent in the private rental market than they have been historically.

The Australian Housing and Urban Research Institute (AHURI) paper, authored by Margaret Reynolds, Sharon Parkinson, Jacqueline De Vries and Kath Hulse, showed higher income earners (with annual incomes of $140,000 and above per year in 2021) grew from 8% of the private rental market in 1996 to 24% in 2021.

Rental inspection in Ashfield
Renters in Australia are facing the toughest conditions in at least 17 years. Picture: Adam Yip

Meanwhile the number of renters on lower incomes (up to $46,000 in 2021) had largely remained unchanged between 1996-2021.

Part of this shift likely stems from the deterioration in housing affordability – which has hit its worst level in at least three decades - and long-term structural declines in home ownership.

The PropTrack Housing Affordability Index revealed a household earning the median income in Australia can now afford just 13% of homes sold across the country, while lower income earners can barely afford any.

Increasing house prices and reduced affordability, while not the sole factors, are associated with delayed home ownership. Census data shows that nationally, the rate of home ownership has been lower for almost each successive birth cohort since 1947–51, but importantly research shows that as these younger groups age they are less likely to ‘catch up’ and buy a home.

This highlights why many households who might’ve once bought a home are now renting.

Distributions of private renter household incomes, Australia, 1996–2021

Concurrently, PropTrack's Rental Affordability Report found renters faced the toughest conditions in at least 17 years in 2023.

Looking back over the past four years, rental prices have surged 42% across the capital cities and 41% in regional areas since the pandemic onset.

These rapid rental price increases have greatly outstripped household income growth, and as a result, the portion of income required to service rents has shifted higher.

This means the share of rentals affordable for households across the income distribution has declined.

Meanwhile, rental price growth has eased this year but remains strong.

In the year to March 2024, national median advertised weekly rents increased by 9.1% or $50 per week, hitting $600 per week at the end of the March 2024 quarter. This growth was driven by capital city markets where median rents have hit $625 per week, up 4.2% over the quarter and 13.6% over the year.

In March 2024, a median household earning $110,000 a year could afford just 30% of advertised rentals on realestate.com.au, based on that household spending 25% of their pre-tax income on rent. In Sydney, the most expensive rental market, that share is just 16%.

Lower income households can afford almost no rentals advertised in March 2024.

But importantly higher income earners can make tradeoffs to seek out more affordable rentals, meaning lower-income renters are facing tougher competition.

This creates a problem given the increasing share of higher income earning renters seen over the past two decades.

Those increased numbers of higher income earning renters moving to cheaper properties and markets when rents are climbing increases competition for lower income households renting similar stock in the same locations.  

Cost-of-living pressures have seen increased demand for cheaper rentals and resulted in stronger rent growth for these homes than for other rental properties.

To some extent, this illustrates the pressures that have emerged in smaller capitals and regional markets that have seen rental prices surge since the onset of the pandemic.

Many people have taken advantage of remote work arrangements and moved to less expensive regions and as a result, net migration from cities to regions remains above the pre-COVID average. At the same time, population growth has remained strong in lower cost capital cities.

While all parts of the country have seen strong growth in rents, growth has been particularly strong in Perth where rents have increased 76%, equating to $275 per week since the start of the pandemic. Brisbane and regional Queensland have also seen very strong growth increasing 50% ($200 per week) and 55% ($210 per week), respectively since March 2020.

The strong growth in rental prices overall, and even stronger growth in cheaper markets has seen the share of affordable rentals decline sharply.

These forces are placing immense pressure on lower income households, as not only are they competing more with higher income earners for cheaper available rentals, but those cheaper rentals are in ever shorter supply.

For households earning in the bottom 20% of households ($49,000 a year or less) just 1.3% of rentals advertised in March 2024 would be affordable.

Meanwhile, a household in the bottom 30% (earning $67,000 per year) would have found just 3.4% of all rentals advertised in March 2024 were affordable. To be able to afford even one-in-three advertised rentals, this household would need to spend more than 40% of their income on rent.

It's clear it has become almost impossible for lower income households to find a rental property that they can afford, affirming the requirement of rental support for low-income renters.

Surging rents and a lack of affordable housing is just one part of the housing crisis the country is currently in the thick of.

The bad news is significant and imminent relief of the challenges faced in the rental market seem unlikely, with demand for rentals expected to remain elevated and supply to remain low leading to higher rents. However, the good news is that we expect rents to continue growing at a slower pace.

While increasing Commonwealth Rent Assistance can be used as a short-term method to offset rent increases, improving rental availability is key to solving the issue long-term.

Given these crisis conditions in the rental market with rental vacancies close to record lows in most markets, it’s clear we need more affordable and available rentals.

This is particularly for lower income households for whom almost no rentals are affordable, highlighting the critical need for increased supply of social housing.

There are other strategies that can help alleviate rental market challenges such as supporting first home buyers into home ownership, better utilising millions of spare rooms, or encouraging those with homes that are too large for their needs to downsize.

But longer term, sustainably improving rental affordability will require improving availability and increasing the provision of affordable housing.

National Cabinet has agreed to build 1.2 million well-located homes by 2029 but we are not on track to meet this target and we need to do more. Further to really address the lack of affordable housing, a sustained increase in affordable social housing is needed.

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