The Rental Affordability Index: tracking Australia’s rental affordability nation-wide

Urbecon Volume 4 2015

A partnership between SGS Economics & Planning, Shelter Australia and Community Sector Banking has created Australia’s first Rental Affordability Index (RAI). The RAI provides a crucial tool for policy-makers to track rental affordability trends and inform evidence-based policy responses. In particular, the RAI is a valuable tool for quantifying the rental affordability challenge in a way that brings out nuances between places and highlights the experiences of disadvantaged households.

Background
Studies of housing affordability in Australia have focused primarily on purchase affordability (e.g. Housing Affordability Index) and measuring housing stress at different points in time for different household types. However, a gap has existed in tracking rental affordability over time across Australia. The RAI fills this gap, providing insights into how rental affordability impacts different places and household types. Its basis is customised data and analysis revealing affordability trends in the rental market, with a particular focus on low income households. Rental affordability concerns a growing and already large proportion of Australians as households increasingly face constraints to purchasing their first house. Renting households on average have lower incomes, and therefore affordability issues affect renting households more than home owners.

The RAI method
It is generally accepted that if housing costs exceed 30% of a low income household’s (households with the lowest 40% of income[1]) gross income, then that household is experiencing housing stress (30/40 rule). For the RAI, households that would be required to pay 30% of income on rent have a score of 100, indicating that such households would be at the critical threshold for housing stress. A score of 100 or less indicates that households would pay more than 30% of income to access a rental dwelling, meaning they could be at risk of experiencing housing stress. Using this method, the following household types are examined and mapped in detail across most Australian suburbs:


  • Average income households
  • Family households
    • 20% of households within the lowest household income quintile (Q1). These households are often welfare dependent.
    • 20% of households within the second lowest household income quintile (Q2)
  • Non-family households (primarily lone person households)
    • 20% of households within the lowest household income quintile (Q1)
    • 20% of households within the second lowest household income quintile (Q2)

Summary of findings, interactive mapping
The RAI results highlight that rental costs for a household with average earnings are generally affordable across Australian cities and regions. However, there are geographic variations showing that some locations, particularly (inner) urban areas, face a critical lack of affordable rental housing even for average income households. Furthermore, low-income households face unaffordable rents in most suburbs across the country.

The results of the RAI are published in full here and can be visualised via an interactive map here with results over a time series between 2012 and 2015 quarters for most Australian localities. Some of the key results are summarised below.

Rental affordability in Greater Sydney is very low, with even average income households close to housing stress, (needing to spend 28% of household income to access a rental dwelling: very close to the rental affordability threshold level of 30%). As the map shows, rental housing becomes generally affordable only west of Parramatta. The situation is aggravated for very-low income households. Rental affordability levels in regional NSW are very similar to that of metropolitan Sydney. Renting a home in regional NSW would see very low income non-family households (Q1) spend 83% of their income on rent. Housing responses for these households are likely to be limited to social housing.

FIGURE 1 SYDNEY RENTAL AFFORDABILITY (view larger version)

Greater Melbourne has consistently been the most affordable capital city over the last three years, with households paying about 24% of income on rent. However, rents are severely unaffordable for households in Greater Melbourne’s first income quintile (Q1), with non-family households affected most severely. Renting is less affordable in Regional Victoria than in metropolitan Melbourne and is well below the affordability threshold for low income households.

Rental affordability is relatively strong and is improving in Greater Brisbane. However, a very-low income family household (Q1) would need to spend 54% of income on rent, while non-family households (mostly lone-person households) would need to spend 91%. Similar to Greater Brisbane, rental housing in Regional Queensland is relatively affordable for the average household. However, family households on very low incomes (Q1) are exposed to extremely unaffordable rents.

In Greater Adelaide the average household faces moderately unaffordable rents, paying approximately 26% of income to enter a rental dwelling. To access a rental dwelling, very low income family households (Q1) would pay 59% of income. Rents are generally affordable in Regional South Australia for average income households. However, very low income households face unaffordable rents.

Greater Hobart is often regarded as an affordable lifestyle option, but the data shows it is the least affordable capital city after Sydney. The average household would pay 27% of income on rent. Incomes are relatively low in Greater Hobart, while rental yields are high. Regional Tasmania has experienced a worsening trend in rental affordability between 2012 and 2015.

Rental affordability has been improving strongly in Greater Perth over recent years. Presently, the average household would spend 25% of income on rent if they accessed a rental dwelling under current market conditions. Nevertheless, rents remain critically unaffordable for Q1 households, particularly for lone person households. Regional Western Australia (WA) has seen a significant increase in rental affordability over the past three years. However, rents are still unaffordable in mining areas such as Port Hedland and for very low income households across regional WA.

Future directions

The RAI provides a tool to monitor trends in rental affordability across most of Australia. Recent trends show deep variations to households’ access to affordable rental housing based on where people live and their socio-economic status. The impact of rising housing costs means that some households face limitations in covering other living costs, like food and transport. It also highlights a geographic divide between where high-quality services and opportunities exist and where households can afford to live.

By tracking both the overall trend in rental affordability, as well as the particular locations and household groups that fare worse, policy responses can be targeted to address both structural and specific issues. Some alternatives might include increases in capital investment in social housing, a government underwritten housing bond to stimulate affordable housing delivery, urban planning reforms to increase affordable rental housing (for example through inclusionary zoning and value capture mechanisms), and fiscal instruments such as changes to negative gearing. While the RAI publication does not detail policy options, it provides a tool that can inform policy debate as well as support future studies into housing affordability.

Footnote

[1] First income quintile households are often welfare dependent and second income quintile family households are often working households, including for example dual income households of key workers in teaching, nursing or apprentice trades.