Effect of Rent Increases on Housing Stress in Australia

1. Effect of Rent Increases on Housing Stress in Australia Second Australasian Housing Researchers’ Conference University of Queensland 20-22 June 2007 Quoc Ngu Vu NATSEM, University of Canberra

2. Acknowledgement This presentation is based on results from a consultancy project for the Housing Industry Association.

3. Introduction • Over the past decade, there has been a large and steady increase in the housing prices in Australia as well as in its states/territories • Owning a house, therefore, is getting more difficult and people have to rely on rental property for their accommodation. • Due to the mismatch between demand and supply of rental property, the rent of private property has also on the rise, especially over the past few years. • Higher rents have several adverse impacts on renters, particularly causing more household renters to fall into “housing stress”

4. What is housing stress? • “Housing stress” happens when a private household renter has to pay at least 30% of their disposable income (i.e. income after tax) on rent. • This paper studies the impact of an increase in rents on the number and proportion of households in housing stress in Australia and its states/territories. • It also investigates factors behind the difference in housing stress rates between different states/territories. • In this study, rents are assumed to increase by 2%; 4%; 6%; 8%; and 10% in real terms in each year during the 2007-08 to 2011-12 period.

5. Methodology • A status of a household being in “housing stress” or not depends on the share of its disposable income spent on rents • Its disposable income is determined not only by its private income amount, but also by a complicated system of tax and transfer payments in Australia • Determining the disposable income of a household is relatively complex due to the interactions between different welfare payments, tax, and the specific circumstance of the household • For this study, the calculation of the household disposable income and housing stress figures is done by STINMOD.

6. What is STINMOD? • STINMOD is a static micro-simulation model of the Australian tax and transfer systems • This model is developed and maintained by National Centre for Social and Economic Modelling (NATSEM) • STINMOD can be used to accurately estimate the disposable income (as well as many other variables) of a household at a given private income level • This is done by interacting that private income level with the specific circumstance of the household and the existing tax and transfer systems at the time • More information on STINMOD can be found at: www.natsem.canberra.edu.au

7. How is STINMOD used in this study? • Demographic and other income variables of the income units/households from two ABS surveys (Survey of Income and Housing 2002-03 and 2003-04) were manipulated using special techniques to create the basefiles of STINMOD. • The basefiles of STINMOD were created in such a way that they represent the Australian population at 6 points in time: current year, and 5 years in the future. • In each basefile, there are thousand of observations and each has hundreds of demographic and income variables, including the rent payment, private income, and place of residence.

8. How is STINMOD used in this study? • Given the level of private income and rents of each household in the basefiles, STINMOD interacts them with the tax and transfer system, effective at the corresponding year, to produce final disposable income for the household • Based on the amount of rents and final disposable income of each household, the “housing stress status” of each household in the basefiles can be determined • Based on these basefiles, appropriate tables can be created to show the housing stress situation for entire Australia and its states/territories

9. Results: Housing stress for Australia • The higher level of rent, the more households fall into “housing stress”. This holds for all the years and all 5 scenarios of rent increase • In 2007-08 on average, a 2% rise in rent causes more than 12,000 additional households to fall into “housing stress” • At existing level of rent, 292,000 households are in “housing stress” in 2007-08. This number increases to 566,000 by 2011-12, when the rent rises by 10% • In relative numbers, a 2% rise in rent adds between 0.5 to 3.2 percentage points more to the existing rates of housing stress

10. Results: Housing stress for AustraliaNumber of households in housing stress

11. Results: Housing stress for states/territories • Among all states/territories, QLD tends to be the state with highest rates of housing stress for most of the years and scenarios • NSW and VIC rank just behind QLD; the rate in VIC is slightly less than that in NSW • ACT and NT, as separate group, stand behind VIC for most of the years and scenarios • WA, TAS, for most of the years and scenarios, have lowest rates of housing stress

12. Results: Housing stress for states/territories

13. Results: Housing stress for states/territories

14. Results: Housing stress for states/territories • In absolute number, around a third of total number of housing stress households in Australia live in NSW • Around 29% of this total number live in QLD, despite its being the third most populous state • VIC has the next highest number of households in housing stress after QLD – around 20% • TAS and ACT/NT has the smallest number of households in housing stress – around 1% to 2%

15. Results: Housing stress for states/territories

16. Results: Housing stress for metropolitan and non-metropolitan areas • Among the metropolitan areas, Brisbane has the highest rates of housing stress for most years and scenarios, followed by Melbourne, Sydney and Adelaide • Perth is the city with lowest rate of housing stress for almost all years and scenarios • For the non-metropolitan areas, the housing stress rate is highest in QLD, followed by NSW and VIC, and lowest in SA • Broadly, the housing stress rates are slightly higher in the non-metropolitan areas than in the metropolitan areas

17. Results: Housing stress for metropolitan and non-metropolitan areas – base case 2007-08

18. Factors behind the difference in housing stress rate • Disposable income: the average level of disposable income is quite different between states and territories • Rent level: the average rent level is also significantly different between states and territories • The relative rankings of states and territories is not consistent between the level of rents and the level of disposable income • The absolute difference between rent and disposable income levels is quite different between states and territories

19. Rent and disposable income ranking between states and territories

20. Gap between rent and disposable income level across states/territories and years

21. Conclusion • It is likely that private rents will keep increasing in the context of the mismatch between supply and demand for rental property • Higher rents will put more households into “housing stress” no matter when, where or by how much • A small increase of 2% in rents would add around 12,000 or between 0.5 and 3.2 percentage points more households into “housing stress” • The increase in the rents has different impact on housing stress picture at different state/territories; different metropolitan and non-metropolitan areas • Differences in disposable income and rents are the factors behind the difference in housing stress rate across states/territories

22. Effect of Rent Increases on Housing Stress in Australia Second Australasian Housing Researchers’ Conference University of Queensland 20-22 June 2007 Quoc Ngu Vu NATSEM, University of Canberra