S1 E2 - Navigating Melbourne's Challenging Rental Market

Explore the challenges and changes in Melbourne's rental market as demand outstrips supply, impacting renters and rental providers alike.

Transcript

 Welcome back to Inside Melbourne's property Market, brought to you by Jellis Craig. if you missed our first episode, I encourage you to go back and listen to our conversation where we discuss what's really happening in Melbourne's property market. It's filled with valuable insights and analysis. I'm Nick Carah, your host and general manager at Jellis Craig.

And I'm excited to continue our exploration of Melbourne's property landscape. Today we're gonna delve into an important and timely topic, the challenging landscape of Melbourne's rental market. Renting a home in Melbourne can be quite challenging, almost never more so than right now. And we'll be exploring the reasons behind this situation, discussing key factors that contribute to the current state of the rental market.

I'm pleased to welcome back Nick Dowling, the CEO of Jellis Craig as our guest today, Nick brings extensive industry experience and a deep understanding of the Melbourne property market. So welcome back to the podcast, Nick. Um, there's been a lot of recent media courage about a rental crisis in Melbourne and indeed across Australia, and it's, it's an issue that's impacting major cities right across the world.

Uh, much of the commentary centers around a large mismatch in the demand for and supply for residential properties available to rent. And we're seeing this play out, uh, both in terms of the struggle to find suitable rental accommodation and indeed some really severe pricing pressure on that rental property market that is available.

What's driving these demand and supply mismatches in the rental market? 

Yeah, it certainly is a, uh, rental crisis for, for people that are trying to find a property and trying to keep up with increasing, um, rents, um, let alone the challenges we face in, in social housing. Um, we've never seen, certainly in many decades never seen such a, uh, imbalance in.

The sort of supply and demand factors on the, on the rental market? Yeah. Our company manages over 22,000 properties and our vacancy rate usually hover somewhere between three and 5%, depending on what's going on At the moment, it's less than 0.5%. Um, with, with rental prices going up, population growth is one of the key factors.

Just the sheer number of, of new people coming into our city, um, into our suburbs, um, which is great on many levels, but, Uh, all of these people need to, to live somewhere and, and if the numbers are correct, there'll be 400,000 new immigrants into Australia over the course of the next 12 months, and we've never seen it, um, that high.

So the demand for housing is, um, you know, both mainly from an international level, but even a little bit from interstate level during the covid years. We had some, um, some, you know, some of the population leave Victoria for, for different states and, and some of those people are coming back as well. Uh, post pandemic people want more space.

They want to get some of that, um, space back that they've had. So that's, um, sort of more homes required, uh, per population. The demographic mix is playing into, into it as well. A large proportion of the population as we speak, are in their sort of early twenties to mid thirties, which is typically the renter's market or a decent proportion of the, the renter's market.

So again, a bit of a weight of numbers, um, issue there. And some people aren't, understandably keeping up with their, their mortgage repayments or, you know, reassessing, um, you know, how much they're having to stretch to continue to, to keep on top of a mortgage on a home that they, um, have purchased. And, and some people will relieve that pressure by, um, selling up before things get too tough and, and having a, a period of time in the rental market.

We're starting to see a little bit of that, um, filter through. Um, supply I've, I've sort of touched on previously. I think that's probably the biggest issue and it's the combination of some chronic undersupply issues colliding with those demand issues that I, I talked about, and this is not a new thing, it's a long term trend.

There are not. A lot of, uh, enough developments coming through in Melbourne and, and this applies right across the country, but Melbourne's right up there in terms of a chronic, um, undersupply of properties at all levels, whether that be social housing and mid-market developments, house and land, even upper market, um, complexes.

There are a number of things that, that could be done better. I think government coordination at all levels could be better. For more speedier and, and, and more, um, decent approvals and, and, and proposals being put forward. And that's not something that's gonna change overnight, but this is not just an issue we're trying to fix for the next 12 months.

We need to fix this for, you know, for a long period of time. So that's an area that, that, that needs to, um, improve. There's a need probably driven by government for larger scale institutional money to come into the residential market. Uh, particularly to help supply on the rental side of things. So, and we've seen this working quite well in some other major international cities, um, overseas.

And that's what people mainly refer to as the build to rent market. So large institutional money, super funds, international money. Um, actually doing large scale developments with the intention of of renting them out. And in a lot of cases, having a social cause aspect to it where the tenants actually have an attached savings plan to end up buying that, that property.

It's working overseas, it can work here. We just need to get the, uh, The formula, right? There's some other, um, more, uh, you know, these, they're slightly smaller but will make a big difference. You know, the number of properties that are unoccupied in Australia estimates, um, are around 5%. Even if it's half that, that's a lot of housing stock that's sitting unoccupied for no good reason.

If we can. Come up with either punitive measures or, or incentive measures to loosen up some of that housing stock. I think that will will make a big difference. Just a supplementary 

question there. We've seen, um, quite a dramatic change, uh, in Melbourne's, uh, rental market in the last couple of years. If we go back to the Covid period, uh, we, we saw a lot of stress in casual work, which played out in terms of.

Uh, affordability issues in, in, in the rental market, particularly in the inner city. And it translated into a lack of demand. So it was a different style of rental crisis, and it feels like it's, it's almost flipped on its head with the return of overseas students, uh, the, the revitalization of that education sector.

And I guess people wanting to reclaim their sense of home maybe after having had to do the share house or the dreaded move home with mom and dad. Um, I guess how are we seeing that play out and how big a factor is that in terms of driving demand in those core inner city markets, which Alice Craig tends to 

operate?

Yeah, it's a great, great summary, Nick. And, and that that is the, the list of factors that, um, Is Dr. Driving that sort of social aspect of it, it, it did flip on its head. Uh, it wasn't overnight, but it was over a matter of months, you know, 12 to 15 months ago, um, where we saw definite signs of that shift from what was a tougher, um, you know, rental market during the pandemic.

Things were quite different to the demand while exceeding the supply for all of the reasons that you talk about. And I think when you think through those social and demographic aspects, um, Those trends aren't short-term trends, so I think it's, you know, that the issues that we've got without increased supply here to stay for some time.

I'd like to 

move on now onto development and, um, we touched in podcast number one, the, the issues surrounding building costs and. The inflationary pressures we've seen from the war in Ukraine. Uh, the supply bottlenecks, uh, the labor inflationary pressures we've seen particularly in Melbourne with the competition from large infrastructure builds.

Uh, and I guess that time delay of, uh, that migrant population coming back into Melbourne that's traditionally filled, uh, a lot of that early stages of the, the, the trading market. Um, it's been a complex time in building. Yeah. We've seen some stress in that first homeowner builder sort of market, uh, and a lot of challenge around a market that hasn't been growing in price and trying to marry that up with a, a rising cost of building.

So there's a lot of challenges there, but we have, as you said, this increase in population and quite an expansion rate. Outlook, uh, when it comes to Melbourne's position in Australia, I mean, how do you see the improvement coming through that development sector? What needs to happen in, or what needs to change in order for us to be able to accommodate the growth that we're all expecting?

Mm-hmm. 

Yeah, look, it's, it's a difficult one. Um, certainly you're right that, um, you know, there are many difficult occupations and types of businesses to run during the pandemic. And, um, running a building company's certainly been a challenging, uh, gig for the last. Few years and, and, and still is due to the unpredictability of the business, their longer term businesses, their longer term plan businesses anyway.

But certainly with, um, the unexpected increase in the cost of materials, the cost of labor, the shortage of labor, the shortage of, of, of materials through the supply chain issues, um, there's been a lot of stress there and that has ended up leading to, um, a significant dent in, in, in confidence in some markets, but, Mainly just an undersupply of new development stock coming through as we speak because of what those companies have been dealing with and, and grappling with over the last sort of couple of years.

Um, it's not something that's gonna change quickly, unfortunately, but we are now just starting to see. Some of those factors turn around, uh, and, and pointing back in the right direction. Inflation's coming under control. In recent, um, weeks, we've seen just the first reports of construction costs internationally now starting to come off.

A lot of the supply chain issues have improved. Um, hopefully we're seeing stabilization in some of our local building companies. Um, we saw, you know, one prominent large scale builder go under a, a couple of months ago. Um, there were worries about others. I'm not sure they're all outta the woods yet, but we're starting to, I think, feel better about the future there.

There's a lot of improvement required on the approval process and the community involvement process, and I'm in approval process at a, a local, state and government level and how they engage with the community, so, so we can make sure. That the, the, the scale of development of new housing stock that we need, uh, ends up flowing through.

Another huge factor that needs to come into play in our country, and we're starting to see some early signs of it, but we're well behind the times compared to other major international cities, is the build to rent sector. Um, and that's where we really start to see, um, larger scale institutional money come into the resi market.

Um, at the moment, the vast majority of investment stock, which is what supplies the rental market, is owned by mom and dad, investors, you know, your normal mom and dad investors who've managed to, to, to gear up or afford an investment property. Okay? There's a bunch of more affluent people that might own a handful of investment properties, but they're still individual investors.

So build to rent, um, is the avenue for larger scale money to come in and, and those, uh, institutions or developers, Um, largely look to build stock that is not only for rent, but it actually gives the renter an opportunity to buy that over time. So it's a great concept and it's a concept that Australia needs, uh, and the government needs to make sure they're playing a role in making sure there's, you know, sufficient ability for those approvals and, and sufficient incentives so that the, uh, economics of those developments stack up.

Yeah, 

it's a, it's a fascinating point and I think Australia's relatively unique with our three tiers of governments. And I wanna touch a little bit on alignments. You know, we've talked about the federal government effectively turning the tap back on in terms of, uh, immigration and that really, as we know, will fuel that population growth.

That will underpin further demand for property. So it's incumbent upon the next tiers of government to, I guess, embrace that as a virtue. And I guess the social messaging is perhaps what's missing. We still see a lot of, uh, development, uh, apprehension in some of the inner city markets. And you've talked a little bit about under utilization of property potentially, and either unoccupied or, or increasingly under.

Occupied, uh, plots of lands within that sort of 10 to 20 k sort of precinct of Melbourne. So do you see that as an important aspect, Nick, in terms of alignment of messaging? And what do you think we can do as an industry to, to help that message around where the supply needs to come from? 

Yeah, it's a great question.

I think the main thing that the industry and the community can focus on is better cohesion between. Developers and local residents, because there can be a mismatch in understanding of what will actually benefit the local community, because if we have sufficient supply of new property coming through, they need to be appropriate developments in all cases.

But it can actually help the, the local economy. It can actually help keep a lid on local rental prices, which in turn can help keep, you know, a, a, a lid on the, the, the, the sale prices of those homes as well. Sometimes there's a disconnect between, it's all about the developer making a profit rather than it being good for the local community.

So that's something that I, I, I think that as an industry we can help, um, improve that cohesion the government, uh, of all levels. You're right, we've got a complex system of local, state, and federal government that all have different budgets and different, um, you know, authorities around the process. The planning process is, is very complicated.

Uh, it's very bureaucratic at times. I think some parts of it have improved, but there's certainly, uh, room for improvement there. And we really need to see governments on both sides, at all levels who are making promises around funds and build to rent and social housing actually stepping up to the market and delivering on those now because I think there's better thinking in some of these aspects, but some of the execution and the delivery is, um, He's leaving us wondering a little bit.

But um, other than that, I think, um, in our taxation system, uh, incentives for investors, I've touched on before the fact that just at the moment there's a slightly worrying trend around investors. Some of the mom and dad, mom and dad investors leaving the market because just that cost of owning an investment property has lost some of its shine, particularly in a market where prices aren't necessarily rising.

And that's. Going to hurt the rental market. It's gonna hurt the, the, the social issues that are coming off the back of this rental crisis. So, You know, we need to, as an industry, make sure the government are, are aware of these issues and that we can put things in place to, to make sure they're turned around.

I'd 

like to shift the conversation now a little bit more towards some of the challenges that property owners or investors are facing, uh, in the rental market. Um, a lot of the conversation is rightly. About the struggles renters are facing in terms of accessibility and pricing pressures that's playing out in the form of increased rents.

But a number of factors have impact, uh, have impacted, uh, property investors over the last 12 months and increased that burden of what it means to be a property owner or investor. Uh, in the current market. So can you walk us through what some of those factors, some of those changes have been? And I guess what's been the flow on effect to the availability of rental stock in 

Melbourne?

I would summarize them as costs and compliance is probably the two areas that, that, that did capture most of this. So from a compliance point of view, Um, and the vast majority for good reason, the compliance requirements around owning an investment property have gone up considerably over the last few years.

So I think the underlying reasons for it are sound and in many cases quite good because they relate to safety of the property and, um, and security for tenants and so forth. But it has made it more difficult for, for landlords and, and, and, and less desirable in some cases, for landlords to retain. Those properties.

The cost side is, is, is a bigger issue in that, um, whether it be land tax insurance, obviously the cost of debt with interest rates going up 12 times in, in, in the last sort of 12 or 18 months, the cost of maintenance and, and, and trades. Um, The vast majority of costs that go into owning and managing an investment property have gone up significantly in the last sort of 12 to 24 months.

And, and that, um, you know, as he's making it a, a different equation to assess when, when landlords are getting. To the end of the financial year and doing their tax returns and seeing that a positive that, that a property that was positively geared is now negatively geared, or, or one that was negatively geared that they could afford, is now heavily, negatively geared that they wonder whether it's worth hanging onto it.

Because if it's negatively geared, they're usually doing it to get price appreciation. Um, if know over the period of time when we're in a, you know, have been in a, in a period where there hasn't been a lot of price appreciation and, and not necessarily a lot of belief. But there might be a lot of it coming in the next couple of years.

So we've seen a worrying trend, you know, worrying in terms of needing to find fixes for the rental crisis. Trend of landlords selling their investment properties. Now, it's not across the board, but it's a material number of of landlords that are just reassessing at the moment. They have been for six to 12 months around.

Is this worth me holding onto? There are a lot of people struggling with the cost of living at the moment, and, and, and obviously the, their interest repayments on their home mortgage going up a lot. So rather than getting themselves under too much pressure on the home. Some people are offloading an investment property just to deleverage their personal balance sheets a little bit, and not all of those properties are selling to fresh investors or new landlords.

Um, some of them are going to owner occupiers and, and, and that's a worrying trend in terms of a, a chronic undersupply problem that we've already got, uh, in the rental market. 

Yeah, it's, there's some interesting points in there, Nick. I think I read some statistics recently that, uh, there's around 2 million individual Australians that have a, an active interest in an investment property, and we know that around 80% of the current residential rental stock is owned by what we might be classified as mom and dad investors.

I think something around around 75% of those. Own only one residential property. So it's again, back to that alignment message that, uh, at times, whether it's media or government message, can be a little bit punitive. Uh, in terms of the profile of investors, when in fact the, there's a large degree of democratization around the ownership.

So again, you know, just back on that messaging and, and need to get, I guess, some consistent narrative to encourage investment and ensure people are motivated to enter that market. You know, do you see that as really important to get that confidence back in the sector? 

Um, that, that's a really interesting question, Nick.

As you say, most investment properties are owned by, by mom and dad. Investors, normal Australians that, um, have geared up to buy their first in property, first investment property. A lot of investment property is owned by people who own one. Uh, now as you get into the. You know, more than two or three or four investment properties.

That's certainly the more affluent part of the population and not a lot of our investment stock, our residential investment stock is owned by what I would call institutional money. And I think that that's something that, that could change. Um, sometimes the messaging can be around the fact that it's only rich people that own investment property.

That's not quite correct, and I think it's, as you've pointed out, it's really important that. Not just the government, but us as an industry point out that, um, owning investment property can be for a lot of people. And it, you know, it is, it is a, a very, uh, Australian way and still a very beneficial and productive way of, of producing wealth over time.

And we don't want, um, you know, our country or a great city to lose that, that motivation. And we have lost a bit of that in, in recent times. I think the market will self-correct a little bit on this now that prices have stabilized. Now that I think costs are, are coming back in the right direction a little bit, but certainly some advocacy around this would be welcomed.

Where I think more advocacy would be welcomed is getting some institutional money into some larger scale development that the mom and dad's, uh, are never going to fill that hole, even if we're, you know, um, doubled in our motivation because we need more new development. We need a lot more social housing.

We need large scale super funds coming into the marketplace, and the government can play a role in making sure the economics of that stack up. Um, and then we need better government cohesion around the approvals process because there's a real mismatch there really in, in, in a lot of communities around the purpose of the development, um, versus what's in it, you know, for the local community.

And, and that's something that we're trying to play a role in, but it's a, it's a slow change. 

Yeah, it's, it's fascinating, Nick. I mean, we, we are seeing no doubt, an increased amount of political commentary in this space, um, both federally and at state level, which is, which is promising. Um, but as we know, there's a considerable delay factor in terms of, I.

Rhetoric in terms of action and, and the very inherent nature of housing is it takes a long time to build, whether it's build to rent new homes or, or the like. I mean, what's your degree of uh, I guess confidence that things like the Housing Australia Future Fund, Victoria's Build to rent initiatives that have been more recently announced are gonna provide that catalyst, as you say, for institutional investment superannuation funds.

Do you feel like. We're starting to bridge the gap. What else do you think needs to happen in order that to get some traction? 

Uh, I think they're, they're good, but they're not going to be the sole answer. I think the more that governments of all levels can address this chronic issue of undersupply, the better.

But the nature of the beast is that it will be slow change, you know, and if you look at the, um, you know, the, the, the current federal government's, um, commitments to increasing housing stock, I. It's having trouble getting through, you know, the necessary support channels. Um, hopefully it'll get there, but it takes some time and I think we need quick, quicker action than this.

So I would fully support, um, all of the initiatives that have, have been announced, but we need to be realistic about the timeline, uh, of which, you know, these will be rolled out if they are, you know, fully executed. I think the bigger answer lies in greater promotion of. Um, you know, a mix of public and private money coming together, or governments in offering greater incentives or greater education to international developers.

Our largest super funds, maybe even private equity to step into the, you know, the only asset class that they're not really in, which is, um, residential, um, property in Australia, which, if you look back over the last 30 years, Has proven to be an incredible investment when you add up, you know, the rental return and the capital return.

We've got a huge undersupply of property. We've got a huge intake of, of new people into our population. We've got, you know, some of the most livable cities in the world. You know, we're becoming truly international cities in Sydney and Melbourne and, and increasingly Brisbane. I've got the Olympics coming, so there's a really good story sitting around.

A, a heavier weight of money coming into actually helping, uh, in a much speedier way, this, this supply of housing stock that we desperately need, as opposed to all of us sitting back thinking, okay, this is better rhetoric from the government. I. That'll fix it because it won't in, you know, on its own. Yeah.

It, it's interesting. I mean, if you step back globally, you know, we see some of the, you know, sovereign wealth funds in places like the United States have a much greater acceptance for investing, whether it's in, uh, entrepreneurial, but could be technology open themselves up. To an element of risk that perhaps wouldn't necessarily sit there in a standard, you know, wealth perspective.

And, um, I think listening to you speak there, we, we've got an immense capital pool in superannuation savings in Australia, and I come back to that alignment of messaging and. The transfer of, potentially transfer of some of that capital pool into that social housing to take the pressure off government.

Mm-hmm. Perhaps with the support of some, some legislation or some favorable taxation or incentivization seems to be, you know, an obvious answer given we know that sector's legislated to grow. Yeah. Where, um, it's compounding it, you know, 10 plus percent per Ann. I, 

I, I, I agree. It is, and, and, and this is a really important issue that Australia has, um, you know, one of the most unique superannuation systems in the world and one of the largest pools of funds per capita that traditionally hasn't gone into residential property because the, the investment managers look at the, the rental return versus the cost of capital and think.

You know, unless we get significant capital returns quickly, it's not a good play for us. But I think the world's changing in that respect that there is so much capital now there's a lot of capital looking for, um, a longer term return, a safer return. You know what we'd call more patient capital. And that's exactly.

Um, you know, what a decent proportion of the super funds should be looking at, and that's again, where Build to Rent comes in. So, build to Rent on a large scale is well structured in the sense that the rental return is set. It, it often gives options to the tenant to buy the property within three to five years at a set price.

So the financial modeling around Build to Rent is a much more certain investment than many other investments that super funds are actually going into. Um, the other area that is probably more of interest rather than being the actual answer is fractional investment. So it's a lot of, unlike buying a couple of grand of shares, um, that lot, you know, some people do, and that leads to, to, to a greater investment portfolio.

It's difficult to take the first step in residential property investment, um, because you need to cough up a lot of money, you know, at least hundreds of thousands, maybe pushing a million dollars these days. So, Fractional investment, um, is still quite immature, but I'm confident that fractional investment is, which is essentially where you buy shares in a property and you pull your funds with other retail investors to buy a property, um, you know, has to make sense at some point.

It's just not well understood. There aren't many, uh, platforms or providers, um, offering it at the moment, but I'm hopeful that that can be a key part of, um, you know, mainstream residential property investment in the future as well. Fascinating. 

Alright, well maybe, uh, as we move towards the close, Nick, uh, let's, let's cast our eye to the future looking forward, um, probably from a, from a property investment point of view and from a rental point of view.

What are your considerations? What are your predictions for the next six to 12 months in 

Melbourne in the next six to 12 months? Um, look, there's, there's a lot of crosswinds, but I'm generally, um, More of a believer that the demand will not subside greatly and therefore from a investor or a landlord point of view, even with a higher, um, interest cost on your debt, that, um, the future's looking pretty promising.

Uh, I say crosswinds, there's things going both ways. Some of the, the small things that are going against that notion that, that it's a good time to invest. Uh, that um, there are some renters that are struggling. I. And we'll continue to struggle with the cost of living. So underneath the surface, we're seeing, you know, quite a number of young renters move back in with mom and dad.

So that will take some of the sting out of the demand, the intense demand that we're seeing at the moment. But it's not a big enough factor to offset this significant immigration number that we're we're seeing. And these. You know, people need to find somewhere to live, and a lot of them are inner city as we've touched on around students and professionals and, and so forth.

And, um, a lot of that 400,000 have their eyes on, on Melbourne. When you look through it over and above, the two main factors are population growth through immigration and lack of supply. They're the two factors that'll continue to dominate. And Melbourne, of course, being a, you know, a great place to live and a very attractive.

Place to live. I think the demand will remain really strong. So that means that, um, whilst rental prices, I don't think we'll increase at 15 to 20% like they have in the last 12 months that's already coming off. It can't run at that level for too long. I do think there will continue to be, uh, an increase in, in rental prices, particularly in, in quality, uh, rental stock in the, in the, in the inner city.

Uh, as we get beyond that 12 month mark, I think we'll start to see. Um, you know, potentially some of the immigration slow down. Um, we may not need it from an employment point of view. Um, Melbourne might start to get a bit of a name as being expense. Too expensive to live these trends. None of these trends last forever.

Um, I think at the same time, um, you know, possibly, you know, 12, 18 months mark, we'll start to see some of these supply issues loosen up. So developers are getting more confidence at the moment to get on with new projects, whether that be ability to Sell material costs, bank funding, but we won't see those new developments for for 12 or 18 months.

The new ones that are being sort of signed off as we speak. So if you look further than 12 month mark, I think. Things will ease a little bit, but not come off. And therefore rental returns will remain quite strong. And then we're heading into that next phase of price growth. So I think then you've got that steadier more known rental return and you're entering another phase.

It might be another four to six years of, of price growth. So I, I certainly, um, think it's a good time to 

invest. There's some fantastic insights there, Nick. And the thing that really strikes me listening to you is, again, that need for alignment. Um, it, it's a multifaceted. Uh, conversation the rental crisis, and it, it, it is tempting and, and it's somewhat sympathetic to focus in on the need of the renter, but increasingly, I I, it feels as though we need that alignment between the regulators, the governments, financial providers, developers, investors, and renters.

'cause they've all got a place to play. In having the confidence to provide the supply, there will eventually be the, the antidote, I guess, to this crisis. So I guess if we can take one message out of your content today is how we package that up together to provide that confidence for people to be an active participant in that rental market.

Yeah, 

I, I, I couldn't agree more, Nick. I think that's a really good summary and I think, um, you know, we can play a big role in that. Great. 

Thanks again for your time, Nick. Thanks Nick. And that wraps up another great episode of Inside Melbourne's Property Market. For further information on this topic, we encourage you to check out the report, which provides in-depth analysis and insights into the rental market.

You can access the report by visiting jealous craig.com au. As always, the full transcript of this episode is available in the show notes, allowing you to revisit any key points or quotes discussed today. Join us in the next episode where I will be speaking with Demographer Hari Hara, Priya Kanan about the understanding of Melbourne's changing demographics.

Until next time.