How did regional housing affordability get so bad?

Rental prices in many regional markets have increased since the onset of the Covid-19 pandemic. Photo: Shutterstock
Rental prices in many regional markets have increased since the onset of the Covid-19 pandemic. Photo: Shutterstock

Despite predictions of a housing collapse early on in the pandemic, COVID-19 has brought with it an unprecedented escalation in regional house prices and rents.

As part of a six-week series, the Australian Community Media property team will be exploring the potential solutions to the regional affordability crisis, asking questions such as whether tiny houses could be the answer to a big problem, and whether local government regulation of short-term rentals needs to change.

But to begin, here is an overview of the different factors that have led to the current situation.

See the rest of the Regional Housing Solutions series.

Read more:

The situation

According to the 2016 census, 26 per cent of Australians, or 2.6 million households were renting.

Rents in regional Australia grew by 6.6 per cent in the year to June 2021, according to data firm CoreLogic.

Dwelling prices had grown by 19.6 per cent in the past 12 months, according to CoreLogic's latest update.

The problem is even more acute in popular lifestyle destinations.

In the South East Tasmania region, just outside of Hobart, rents were up a staggering 23.7 per cent in the year to June 2021.

In the Richmond-Tweed region, home to spots like Byron Bay and Lennox Head, rents were up 19.9 per cent.

The Real Estate Institute of NSW reported that vacancy rates in 10 of the 15 regional markets it tracks were at or below 1 per cent in June 2021.

Changing migration patterns and increased demand

"The main factor behind the rapid rise in regional rents is simply 'supply and demand'," explained economist Saul Eslake, of Corinna Economic Advisory.

On the demand side, figures from the Australian Bureau of Statistics had shown an increasing inflow of people to the regions.

"Figures released by the ABS last week showed that net migration from capital cities to regional areas of Australia reached 44,674 in the 12 months ended March 2021 - that's more than double the annual average of 19,700 per annum over the previous 20 years," he said.

Most of this migration had been been to regional NSW (13,850), regional Victoria (14,012) and regional Queensland (16,337).

But Mr Eslake singled out Tasmania as another location where population growth had been occurring even prior to the pandemic.

"Relative to its current population there's also been quite a lot to regional Tasmania," he said.

"1,728 [people] over the year to March 2021, following 1,913 in the year to March 2020, 1,792 in the year to March 2019, and 1,270 in the year to March 2018. Over the eight years prior to 2018, there had been a net outflow from regional Tasmania, either to Hobart or the mainland, averaging 400 people a year," he said.

Australian Housing and Urban Research Institute managing director Dr Michael Fotheringham said that the pandemic had changed the shape of Australia's housing demand.

"The two key ones [changes] are that people's consumption of housing has changed - the idea of all fitting together share housing has changed, for example," he said.

"The bigger one for regional Australia is the flow of people from the regions to the capitals - to some extent has reversed, more people are doing the sea and the tree change," he said.

As a result, vacancy rates in regional Australia were "below one per cent" in many locations.

"That means that the availability of rental housing is at a historically low point, and where there's less stock available that means prices go up," he said.

The trend toward work-from-home was likely the biggest factor contributing to price growth, as people can now move to smaller regional locations while retaining their city salary.

"It is a big challenge, particularly where we've got new workforce dynamics. In a regional location you've got people looking to move there from the city with bigger salaries looking to live in a better lifestyle in a new location. They are able to better compete for properties for rent or purchase," he said.

"That leads to two things [for existing residents of those communities]. It leads to less optimal housing and it also pushes people to take up housing where they otherwise wouldn't," he added.

Supply issues

Both Mr Eslake and Dr Fotheringham said that the construction industry was ill-placed to respond quickly to the demand for more housing in regional areas.

"We're really good at building in outer suburbs and inner-city but we're not good at building in regional areas," Dr Fotheringham said.

He explained that builders work where prices are highest, and that this had traditionally been in larger urban hubs.

This would likely eventually change as the demand for regional housing pushes the sale price of new homes up.

"That will help encourage builders to do work in the regions more but that doesn't happen overnight, that takes years literally," he said.

Meantime, governments of all levels would need to work to incentivise regional construction, Dr Fotheringham said.

Mr Eslake said that many larger builders would be waiting to see if the rush to regions was a sustained trend before committing to building there.

"There hasn't been much increase in housing supply in regional areas, because until recently there hadn't been the demand for it, and house-building is always slow to respond to increases in housing demand. [This is] partly because builders are understandably wanting to be sure that any apparent increase in demand is going to be sustainable before taking on the risks associated with 'spec building'," he said.

"Although it is now starting to pick up in regional areas, including in Tasmania, there's a big backlog to catch up on," he said.

The NSW government has announced a taskforce in response to this supply problem, tasked with identifying changes in the planning system to speed-up the delivery of new stock.

"With the pandemic transforming the way we live and work, we've seen a noticeable shift in people leaving cities for a sea change or tree change in the regions," Mr Barilaro said when announcing that former planner Gary Fielding would lead the taskforce in June.

"But with that, prices are escalating. This is why we've set up this taskforce to provide independent advice to deliver more housing throughout the State."

'Holidaying at home' has consequences

It's not just new-to-town owner-occupiers who are taking properties out of the regional rental market, it's existing and new investors who are choosing to convert them to short-term rentals as well.

"The short term letting platforms have certainly eroded the availability of stock so the number of properties available for rental have reduced," Dr Fotheringham said.

"We've seen that in all sorts of places but particularly in areas where tourism is part of the local economy and tourism in particular," he added. .

Short-term rental data and analytics company AirDNA monitors the number of short-term rental listings in Australian markets, and found that in the two years to May 2021 the top 20 markets to record an increase in listings were in regional Australia.

Mr Eslake said that at least part of the rental supply issue in Tasmania could "probably" be attributed to this trend.

"Conversion of long-term rentals to locals into short-stay accommodation for tourists, not that we've had as many of those lately as before March last year - that's probably more a Hobart story than a regional Tasmania one, but I would be fairly sure there's an element of it," Mr Eslake said.

Stay tuned for next week's update to the Regional Housing Solutions series on tiny houses.

This story How did regional housing affordability get so bad? first appeared on Newcastle Herald.