The truth about the rental crisis in Western Australia
You are not going to like what you’re about to read.
Why?
Because you’ve been programmed with 20+ years of internet outrage media content into needing to blame someone for everything that’s not perfect in the world. I have too. And I desperately want to lay the blame at the feet of McGowan or Labor or the Liberals or someone. Any of those things would be a lie, however.
If you need to be angry at someone there’s lots of media willing to feed you that. I’m interested in the truth about the matter.
So I’m going to outlay the facts on the ground about the very real rental crisis in Western Australia, and indeed Australia at large, but the situation is very much worse here in Perth and Mandurah than the east coast.
All of the information I am presenting to you is based on very real data, and also my own very real personal experiences. Data is great, but it can be spun to make anything appear a certain way. Personal experiences are also great, but they can be anecdotes taken out of context and spun to fit a narrative too.
Why is there a rental crisis in Western Australia?
Covid.
Not AirBNBs. Not Labor in government. Not the Liberal party policies of the past.
SARS-CoV-2 is why there is a rental crisis in WA and Australia at large, and I will explain why. First a summary, then in more detail.
Let’s summarise the domino effects of covid on the rental situation in WA.
Population spike as people rush home, kicking people out of rentals as owners return to occupy.
Tenants who stop paying rent force landlords to sell, hurts rental supply.
Job seeker etc support doubling creates more demand.
Relationships collapsing creates more demand.
China locks down hard, reducing materials supply, hurting new home supply.
Holiday & helicopter money gets spent pushing up material costs, hurting cost to build.
Property prices increase and landlords cash out, hurting supply.
Heaps of people leave workforce altogether, skills shortages, hurts ability to build homes.
Immigration ramps up creating more demand.
Interest rates get hiked causing huge drop in demand for new homes and loans.
China makes students study overseas, increasing demand for rentals in Australia.
Food and commodity prices boom, labour costs for construction have to compete with these booming sectors.
Background: Existing Oversupply in 2017
To understand why covid hit so hard in WA, one should know the state of mind of investors leading up to it.
The first thing you need to understand is that landlords are not very sophisticated, and nor are they charities trying to lose money each week in order to subsidise someone’s rent.
Sophisticated investors DO NOT typically try to lose $200 per week for 15 years and hope the asset they bought goes up in price to cover years of losses at which time they can sell. Only sports team owners and landlords think that’s clever. It’s the dumbest idea in the history of investment ideas, but it’s so much part of our culture that mum and dad investors just do this without ever questioning if it’s the best way to invest $200 a week.
In the early 2000’s there was a property price boom for various reasons, and circa 2006 it was absolutely nuts. Everyone who could get mortgage for an extra house was getting rich, so countless folks leveraged themselves to the hilt and grabbed a spare home or three and believed within 7 years they’d be retired. That didn’t work out very well. They payed mortgages for a decade and a half and receive a paltry amount of rent back that simply did not even come close to covering the interest they owed the bank. Because so many of us had this idea, the market in WA was flooded with 4x2 brick and tile homes such that the rental vacancy rate hit something like 7% in 2017.
The media portrayed these people as wealthy boomers who were stopping young people from affording a home. But here in Perth that couldn’t have been further from the truth. In reality they were more likely middle class Gen X-ers desperate to try and get ahead in a world of stagnant wages and shitty job prospects if you didn’t like mining, and a constant threat of imminent retrenchment and unemployment if the iron ore price drops overnight.
In addition the huge spike in $300,000 wages from the mining sector going to people with no better idea for their money than “guess I’ll build another 4x2 in Banksia Grove” and the ease at which it was to feel like an investor caused us to plough capital into residential real estate. Plus investing in real estate is a conspicuous investment. Your mates think you’re going places because you have a couple of rentals. They don’t realise you are burning $500 per week AFTER your rental income is factored in and you’re $150,000 under water because prices have been drifting down for 5 years and you would have to go bankrupt in order to get out of your investments.
Eventually people stopped building to rent. You built a house because you wanted to live in it, or maybe because the cost of building was lower than the cost buying established and you could arbitrage the difference, and it only took 9 months to build a basic house so you weren’t tying up your capital for very long.
Slowly, very very slowly, the market was coming back into balance. The years of over building was starting to get soaked up. We didn’t realise the momentum was as strong as it was towards not building, but we had so much surplus supply nobody really cared.
And it didn’t matter anyway, because we thought the world had natural built in mechanisms to rectify any under supply.
What typically happens is this: The moment rent starts to increase, would-be investors do the maths, and go “oh well, it only costs $200k to build a nice 4x2, $150k for a block, $30k to finish it, and 9 months of having my equity tied up. It will owe me $380k and be worth $430k. As soon as it’s done I could flip it for $50k profit, or rent it out for $420/wk. If I do rent it out, that’s a 5.7% return, VERY VERY respectable in a world of 1.5% inflation and 3% loans.”
Typically, that’s what happens.
But then covid hits.
And what happened after that wasn’t typical.
The mad rush home
The population doesn’t continue its usual slow trajectory north. All of a sudden there is a MAD RUSH for the entrance into Australia, and Perth in particular. People living overseas returned home. People living interstate returned home. And as luck would have it, Perth essentially had zero covid for about 2 years, making us the envy of the entire planet, and the most desirable place on earth to live.
Some tenants just stopped paying rent
Now whether you agree or disagree with McGowan’s choices during covid, what was happening was unprecedented, and I personally don’t blame him even for some of the decisions he may privately regret. Heck, it’s hard enough being a single Dad to 3 kids, imagine dealing with 70% of the state in a manic panic and freaking the hell out. He kept his cool and put one foot in front of the other and just did what he felt needed to be done. (No I didn’t vote for him lol).
He made some tough decisions that I’m sure he knew would have consequences later. But that didn’t make them the wrong thing to do at the time necessarily.
One of those decisions was to ban evictions of tenants.
This was a really tough one on many landlords. Most tenants appreciated the assurance that they wouldn’t have to try and find a home during a global viral pandemic. “We’re all in this together” was the vibe.
Others just went “yay free rent” and sent the landlords to the wall.
Many landlords were forced to sell as they still had to pay their mortgages. Banks didn’t say “hey don’t worry about that money you owe us”. I know in some areas the numbers of people who just stopped paying rent was mind blowing.
The net effect of this was probably great for first home buyers and would-be owner occupiers. While the east cost had ASTRONOMICAL price increases in property in the wake of covid, Perth just hummed along with a nice healthy upwards bump. Nice, but nothing record setting. Median prices still haven’t even got to all time highs yet, and the Sydney median is 3 times higher than Perth, despite Perth having a higher median wage. The forced selling was keeping a downward pressure on what would have otherwise been mental price increases.
The net effect of landlords being forced to sell was many homes that would have been reserved for renters were now in the hands of owner occupiers.
Jobseeker doubles
Another impactful decision made, not by McGowan but by the Liberal party, was to double job seeker and Austudy/Abstudy etc.
Nobody condemned this. Everyone was in heaven.
I spoke with property managers at the time, who were previously expecting prices to collapse at the beginning of covid. They told me that the opposite was happening; because so many people now had extra cash, people felt they could leave mum and dad and get their own place, and it was creating insane demand for places.
Relationships break down
Then there was another thing that only occasionally gets spoken of in the media.
Relationships collapsed left right and centre.
Maybe it was the stress of covid. Maybe it was money pressures. Maybe it was just coincidence. But all of a sudden we had thousands of families who previously only needed one house all of a sudden needing two houses.
China shuts down
Then along comes supply constraints.
China tackled covid HARD. Massive lockdowns. Factories shut down. They don’t have the health care we do, so they were extra careful about the virus. Net effect? EVERYTHING involved in the building industry skyrocketed in price.
Every week, every tradie in every part of the building industry was given new price lists. Air cons went up. Flooring went up. Screws went up. Cladding went up. Ducting went up. Tiles went up. Bricks went up. The glue you use to stick your vinyl planks to the floor went up.
Naturally, the price to build a home went up. A lot.
Holiday & helicopter money gets spent elsewhere
And another phenomena was playing out this whole time that few predicted at the beginning of Covid. Because nobody in the West could go anywhere, all the money we would have spent on holidays got spent on … stuff. Oh, and all the helicopter money and loans Americans never had to pay back.
The huge influx of cash that was spent on crap meant you simply couldn’t get a car, couldn’t order a chair, couldn’t even buy a monitor for your computer. Shipping ANYTHING was hit with massive delays. And materials that might have been used on various building supplies that could also be used on anything else now cost way more. The net effect is that not only were building materials getting extremely expensive, you couldn’t even ship them even if you could find them.
This contributed to not just building price increases, but massive delays.
Landlords finally cash out
And then another event happened. I watched this happen in the data, and I watched people I knew first hand do this.
Many investors that had been sitting on their loss making investments for years finally reached close to break even, and so they sold. They saw prices had gone up, and in 2021/22 they got the heck out of the game.
Perth lost over 19,000 landlords.
The rental crisis is actually a landlord crisis. Nobody wants to be a landlord.
Everyone knew the narrative in the media was landlords are evil. There’s zero appreciation for the losses landlords have suffered for 15 years in Perth. They’re treated as if they’re just taking advantage of desperate poor people. So when they finally got back to break even, they just walked away, sold their homes to an owner occupier, and kicked the tenant out. Good-bye. Done. Won’t be investing in real estate again thank you very much.
Can’t blame them.
And if you don’t believe me, jump in some of the desperate “Rentals in Perth” Facebook groups. Every second post is “the owners are selling and so we have to find somewhere else to live.”
I also don’t blame the owners. Despite losing money for years, the only thing they have to look forward to is the government now threatening to take negative gearing away, and I’m convinced that every renter that complains about negative gearing has no idea what it actually is.
Skills shortages
Then another crisis emerged. Skills shortages. In almost every field imaginable, from health care, to building, to people willing to work at a cafe and make your coffee. Businesses everywhere were SCREAMING for staff. It seemed like covid had just made everyone who could afford to retire decide now was a great time to retire. Mums started staying home more and being with their kids (which I fully support). Some homeschooled during covid and decided they loved it and would rather survive on one income. People nearing retirement said “yeah I’m done”. And people who simply didn’t like their jobs just went “nah I’m not going back thanks.”
At an individual level, each of those decisions is wonderful. But for better or worse, it had a massive inflationary effect on what businesses had to pay to get staff.
So with the cost of wages going up for every industry, this ALSO hurt the building industry, putting more upward pressure on the price of building, and delaying construction.
Immigrants competing for dwellings
As inflation began to spiral in part due to wage growth, the Labor govt saw that one way to tackle this as quick as possible was to ramp up immigration, and give student visa holders the ability to work and earn while they’re here. So that’s what they did.
Only problem is all those immigrants also like having a roof over their heads.
So it was a pick your poison kind of choice. Don’t ramp up immigration? Everything costs more and businesses can’t get staff. Ramp up immigration? Now there’s more people competiting for limited housing. No matter what they did here it’s damned if you do, damned if you don’t.
Now when you go for a rental, there’s simply more people competing for the same number of rentals. You don’t need a degree in city planning to understand the obvious effects of this government decision.
Interest Rates!!!
Oh and there was one other little disaster to add to McGowan’s headaches.
The geniuses at the Reserve Bank COMPLETELY dropped the ball during covid and didn’t seem to notice that massive inflation was on its way. I, and many others who actually went to the shops, were screaming at them that inflation was about to get out of control, and they literally said we were all idiots and inflation wasn’t going to be an issue until 2024.
They were so wrong, and had so much egg on their face when inflation data showed they were catastrophically wrong, that they then decided to completely over-react and hike interest rates like their lives depended on it.
So guess what investors did? Exactly what the Reserve Bank wanted them to do. The one and only reason they put interest rates up in the first place.
Stop buying. Stop building. Sell things that you need to sell.
The entire point of raising interest rates is to reduce demand. But the only thing we borrow much money for is housing. And the one thing that we’re in short supply of is… housing. Honestly the idiots in power don’t let their left hand talk to the right hand sometimes. It’s mind blowing to watch play out.
Price fixing is pretty rare in Australia. But for some reason we love price fixing the cost of money. And there’s literally nothing you can do about it as an investor. You are at the mercy of Philip Lowe, the Governor of the Reserve Bank of Australia. BTW did you know Philip Lowe gets tax payer subsidised discounted interest rates for his investment properties from banks because of his position? Link here. You couldn’t make this shit up.
The one thing that we need right now that could fix the rental crisis is new dwellings, and the one thing that the Reserve Bank is doing is trying with all its might to stop you from being able to borrow to build a home, or make any investment mortgage so expensive that it’s not worth investing in real estate.
And it doesn’t really hurt the investor. They can sell, or just go do something else. It’s hurting renters.
China changes study rules
Another surprise from China came recently too. They announced they wouldn’t recognise any university degrees from overseas that were not completed in person. So that creates a huge demand for students to get their butts over here asap. And students need a roof over their heads too.
Students are far more flexible with what they’re willing to live in. But they don’t have big budgets usually. So they’re not competing for the high end $900/wk rentals. They’re competing with all the families in the lower income brackets trying to find something under $400 / wk.
Commodities Boom!
Food prices and commodities prices boomed during covid. The net result is obvious. Mining became super lucrative once again, and the construction industry lost a tonne of labour to that sector. Farming has also been off the chain. Have you checked the price of wheat recently? When it costs $400 for a trolley of groceries you know someone is getting rich.
If you have skills, the residential construction sector isn’t your only possible employer. Mining sites will simply outbid the local building company for a sparky, plumber, or dude who can hold a broom.
That means your cost to build a home is impacted by what China is willing to pay for a tonne of red dirt.
Building industry in crisis
There were 10 in the bed and the little one said “roll over, roll over” and they all rolled over
and the renters who could only afford $350 per week fell out.
This crisis is slowly harming many people. But it first gets those at the very edge who were only barely able to make ends meet as it was. Those are the first to go, and sadly they’re often the most vulnerable in our community.
But while we’ve dubbed this a “rental crisis”, the name is hiding the real cause of the crisis. It’s a “cost and time to build a new home” crisis.
Net result: The maths still doesn’t work to build a new rental property in WA
Not only has the cost to build blown out, the TIME to build has blown out. That means even if it WAS more cost effective to create a new dwelling than just buy an established home, once you factor in opportunity cost for the 2 years your capital is tied up, as well as the fact your building company might not exist by the time your roof is being installed, and God knows what price hikes they’ll try and pass on to you in 18 months time, you’re mad to try and build.
Why don’t we just build more homes?
The problem is “oh just build more homes” doesn’t work, because there is a finite amount of materials and labour available to build and they’re at capacity. It’s not like you can double the number of homes built if you double the amount of money you throw at the sector. You’ll get the same number of homes, and it will just cost twice as much.
I have a neighbour who is literally a home builder who had to wait a month to get his driveway installed. A neighbour waited nearly 6 months just for scaffolding so the builders could start on their second story. Stories like this are endless in WA. My friend who installs air conditioning can barely get a labourer to help him because they can’t find anywhere to stay in Perth when they’re here.
So what’s going to fix all this?
You’re not going to like this.
But I can already see what is going to fix it. I see it every weekend when I go to home opens.
East coast and international investors. They are slamming local real estate agents with demands before properties even get listed. They’re buying stock you didn’t even know was going up for sale.
They have seen what it costs to buy a home here. They have seen what people are paying in rent. They own calculators. They are buying whatever comes on the market in the $450k - $550k range that they can easily rent out. The returns are 3 times better than Sydney or Melbourne. And they know it.
And they have no interest in living in the home. So they’re creating rental stock.
Eventually they will push the prices of real estate up quite a lot here. I wish it was locals that were investing and becoming landlords here, but for some reason locals are still too shy. Prices here don’t feel cheap to us. But I assure you, they feel cheap to people living in a state where the median price for a home is $1.5M.
Once prices are up 50% - 70% from where they are now, building will make a lot of sense, and we will start to create more stock.
Airbnb and short term rentals?
Let’s just talk about AirBNB for a second.
A heap of renters and journalists think the reason all the rentals are disappearing is because greedy landlords are taking the rentals off the market and putting them on AirBNB. I have not come across a single tenant who was evicted so the house could become an Airbnb. And the data shows that AirBNBs have declined a LOT since 2019 in Australia. From this article: “Dr Sigler said the number of short-term rentals in Australia had dropped from a peak of more than 300,000 between 2016 and 2019 to the “low 200,000s”.
I’ve used AirBNB a lot since 2012. I love it. But every single property I’ve used in the past is no longer an AirBNB. Every owner has stopped. It’s not the lucrative money printer you think it is. I currently rent my own home out on AirBNB the week I don’t have my kids. So I live in half the time, and AirBNB it the other. Let me tell you, it’s a pain in the arse, guests are often a pain, and I often wonder if it’s worth it.
But short term rentals make the best holiday accommodation, because you can go with friends or multiple families, take the dogs with you, and park a boat and jet ski in the driveway without too much hassle. Hotels just suck by comparison, not to mention they’re an eye-sore on the street-scape.
As home prices increased, AirBNB owners also sold up and got out of the game. We currently have a massive AirBNB shortage around Perth and Mandurah too. Last long weekend you could NOT find a place in Mandurah. And a friend I know in Perth who AirBNBs a small part of his home constantly has people in it who are on working holidays who would otherwise be taking a rental property off the market. And with rents being as high as they are, AirBNB owners are thinking twice about bothering with all the headache for a few extra dollars a night and damaged furniture.
AirBNBs also help when you’re moving interstate or to a different town. When I moved to Mandurah, we stayed at an AirBNB for a couple of weeks while we found a rental and got established. Now that there’s an AirBNB shortage as well, that is proving extremely painful to do as well.
Getting rid of AirBNBs, which are already in stark short supply, is about as sensible as getting rid of coffee shops because, hey, that space could be used to sleep people too!
