Thursday, April 2, 2009

The State of Supply, part 2: the rental market

In the previous post, I had a look at the National Housing Supply Council's recent State of Supply Report, and in particular its estimate that the Australian housing system presently needs another 85 000 dwellings in order to house the homeless and get an efficient vacancy rate for the rental market.

I also observed that there are about ten times that number of dwellings – about 830 000 – currently sitting unoccupied outside the housing system. All this goes to show that our housing supply problem is not an absolute shortage, but rather that our supply of dwellings does not go to satisfying the housing needs of all our community.

The Council offers another perspective on this problem, this time specifically in relation to rental housing. To do so it reproduces part of a body of research by Judy Yates and Maryann Wulff about the supply of rental dwellings, and particularly low-rent dwellings, and how they are distributed amongst households of different incomes.

They find that are just 91 000 dwellings let at rents that would be affordable for Australia's 237 000 low income renter households: a shortfall of 146 000 affordable dwellings. (This also means, conversely, that the rental market has a surplus of dwellings let at rents that would be affordable for households further up the income scale. For example, there are 739 000 dwellings let at rents that would be affordable for Australia's 363 000 'low-moderate' income households.)

They also show that of these 91 000 affordable dwellings, 56 000 are occupied by households with higher incomes (that is, 'low-moderate' incomes or higher), which increases the shortfall in dwellings affordable for low income households to 202 000 dwellings.

The occupation of lower rent dwellings by higher income households has an effect on the supply of affordable rental housing further up the income scale too. When this factor is considered, low-moderate income households do not in fact enjoy a surplus of affordable rental dwellings; they also suffer a shortfall of 49 000 dwellings.

This is a clever piece of analysis, but I must admit when I first encountered it I found it a bit difficult to get my head around. I hope the following explanation, in the form of two imaginary exercises, helps.


Exercise 1.

Imagine that you've invited a person from each of Australia's private renter households – all 1.47 million of them – to a suitably large and well-catered venue.

'Thanks for coming,' you say over the loudspeaker, 'now, let's get into five groups.'

'Everyone with a low income – that is, a weekly income of $385 or less – you're in Group 1.' (Group 1 forms and has about 237 000 members.)

'Group 2 is low-moderate incomes – from $386 up to $771'. (Group 2 has about 363 000 members.)

'Group 3 is moderate incomes – up to $1 287'. (About 379 000 members.)

'Group 4 is moderate-high incomes – up to $1930'. (About 268 000 members.)

'And those with even higher incomes, you're Group 5'. (About 223 000 members.)

'Right', you say. 'Now, you'll notice that there are 1.47 million chairs of various colours on the other side of the room.' (It is a big venue.) 'Each chair represents a dwelling in the Australian private rental market, colour-coded according to the affordability of its current rent.'

(Chairs. Imagine they're rental houses)

'The blue chairs are the cheapest; these – and only these – are affordable for Group 1. Next are the red chairs, which are affordable for Group 2; then orange, affordable for Group 3; yellow for Group 4; and the black chairs, which are the most expensive and are affordable for Group 5 only.'

A quick scan of the room shows that there are many red and orange chairs, and relatively few of the other colours.

'Now,' you say, 'everyone in Group 1 move to a blue chair.' This they do, except there are far too few blue chairs: just 91 000 for all 237 000 of Group. About 146 000 members of Group 1 remain standing.

'OK', you say to them, 'take a seat on the red chairs. Now, Group 2, please also move to a red chair.'

And they do, and they all find a seat – in fact, there are 230 000 red chairs left over.

Next, Group 3 moves to the remaining red chairs, and then the orange chairs – again, there's plenty of orange chairs left over. It works out similarly for Group 4 and the yellow chairs. Finally Group 5 seats itself in the remaining yellow chairs and the few black chairs.


Exercise 2.

'OK, everyone stand up again,' you say over the loudspeaker. 'That exercise was all very well, but in the real world, the allocation of rental housing isn't such an orderly business: low income households don't get first pick, and high income households don't always confine themselves to high-rent dwellings. So this time, everyone find a chair – and if you want a cheaper chair, go for it.'

A whirling stampede ensues. Blue chairs are nabbed by fleet-footed members of all groups; red chairs, too, are snapped up by members of Groups 3, 4 and 5. When the dust settles, you ask Group 1 members to raise their hands. Only 35 000 of them are in the blue chairs - 202 000 of them are elsewhere. Of Group 2 members, 49 000 are now sitting in unaffordable seats.


Back to the Council's report. The analysis also shows that this problem – of supply and distribution of affordable rental housing – has been getting worse over the years. Over the ten years to 2006, a total of 236 000 dwellings were added to the rental housing system – most them let at more than $300 per week (the equivalent, in other words, of our orange, yellow and black chairs). Over that period, the number of low-rent dwellings – our blue and red chairs – declined by 125 000.

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