EXPLAINED: Are short-term holiday rentals killing the national housing market?

Tucked neatly on the western side of the Sydney Harbour Bridge, Millers Point, one of the oldest suburbs in Australia, was at the time home to 1,323 private dwellings and a population of 1,735. According to the 2021 census, over one-third of those dwellings sat unoccupied on 10 August 2021.

This marked Millers Point as the Australian suburb with the highest portion of empty nests at a time when extremely strict lockdown measures limited the amount of movement Sydneysiders were able to make. Given this, it is highly unlikely to imagine those hollow homes housed home owners who’d simply missed the census due an overseas holiday.

So, what purpose do these vacant homes serve?

A quick search on popular STRA booking site, Airbnb, reveals several properties listed in the neighbourhood, many of which leverage the history and heritage listing of their building and maximise their views of the iconic harbour to garner the attention of holiday seekers.

According to CoreLogic’s most recent Quarterly Rental Review, rents in Sydney rose 13 per cent in the 12 months to July 2023, while data from Knight Frank found luxury rents in the NSW capital grew faster than anywhere else in the world.

But even with rents skyrocketing in recent years, in places such as Millers Point, the economic prospects of landlords leasing their properties on the short-term market appears to far outstrip their returns from longer traditional leases.

A recently published research from Per Capita’s Centre for Equitable Housing revealed STRAs are recouping the equivalent of a year’s rent on the long-term market in just 100 nights. The Light as Air: Regulating Short Term Rentals in Australia report also found STRA properties amount for just 2.3 per cent of Australia’s housing supply and 7.6 per cent of its rental stock.

The report’s conclusions around the financial disparity between short- and long-term rentals rings true in Millers Point. A random weekend trip to an Airbnb in the harbourside suburb in the throes of winter can cost as little as $560 for two nights.

Move that getaway to November, when the weather warms and Australian tourist activity tends to pick up, and those two nights can set holiday-makers back $1,000 – just $100 shy of the suburb’s median weekly rent.

Across the wider Sydney of City Council region, which Millers Point is a part of, there are just over 2,000 STRA properties, according to data provided to Real Estate Business (REB) and Smart Property Investment (SPI) by the NSW Department of Planning and Environment.

And while current laws permitting non-hosted short-term rental accommodation in a dwelling for up to 180 days per year without planning approval exist, the Sydney City Council feels these limitations are inadequate, particularly in the current climate.

“Given the acute housing affordability crisis in the inner city, the City of Sydney has consistently advocated for this to be lowered to a maximum of 90 days,” the council stated.

“In 2005, the NSW government updated regulations forcing local governments to categorise serviced apartments as residential rather than business for the purpose of rates,” they added.

“We have also continually advocated for this to be reconsidered,” the council insisted.

On 1 November 2021, barely four months on from that year’s census, the then NSW government enacted a bill requiring STRA owners to register their property and pay a registration fee. The bill was initially meant to launch in July that year but was delayed following pressures from STRA platforms and local councils who felt it would erode their planning powers.

Sydney, and Millers Point, is a prime example of Airbnbs suffocating the market of much-needed rental supply, but it is not an outlier.

Speaking on an episode of the Smart Property Investment show back in June, Real Estate Institute of Australia (REIA) president Hayden Groves painted a picture of a similar situation unfolding in one of Australia’s most popular tourist markets, the Gold Coast.

He explained landlords in the region “can earn the same level of income from that particular [STRA] asset based on average rents than you would get in the long-term market”.

Remarkably, he revealed STRA owners on the Gold Coast, where there are 5,400 holiday rentals as opposed to 1,700 on the long-term market, can equal the returns of their long-term rental counterparts in as little as 131 days – a finding similar to those of Per Capita’s Centre for Equitable Housing.

“When you’ve got 180,000 of them [STRA] in Australia, that’s an awful lot of property that would otherwise, a decade ago, have not been in the short-stay market,” he said.

In his eyes, short-term holiday rentals aren’t the only element hindering national supply levels, but they’re “one of them”.

Mr Groves shared a conversation between him and the mayor of the Gold Coast, Tom Tate, where Mr Tate openly expressed his council’s plans to hunt ways to release short-term rentals, which spend a large majority of the year unutilised, into the traditional rental market.

Mr Tate is not alone in his struggle to reduce STRA stock and increase the long-term rental prospects of Australia’s fifth-largest city, the Gold Coast. Barely an hour south in Byron Bay, arguably the most iconic holiday destination on Australian shores, a similar battle is underway between council and STRA operators.

As previously reported on SPI’s sister site, REB, an investigation by the NSW Independent Planning Commission into short-term rental accommodation in the Shire and its effects on the wider property market led to 12 recommendations, including reducing the number of nights an STRA property can be rented out.

However, for a region such as Byron Bay, which boasts a $1 billion tourism industry, enacting such changes would incite a $100 million hit to the region’s economy. As Colin Hussey, chief executive at A Perfect Stay, explained, many STRA owners in the region aren’t specifically financially motivated – many harbour intentions to move permanently into their dwelling at some stage throughout their life.

Having spoken with Airbnb owners in the region, Mr Hussey revealed almost all have no intentions of placing their property on the long-term market.

“We asked them why and they all pretty much said verbatim, ‘We bought the home because we want to use it. We want to have a holiday in the Byron area. We’ve been coming there for years. We love it. We want to contribute to the local economy [and] eventually, we think we’d like to move up to the area’.”

However, this motivation isn’t universal. Kosmos Samaras, director at RedBridge Group Australia, believes a key driver of landlords sending their property onto the short-term market is to minimise their dealings with tenants.

“Yeah, I think it’s the money,” he said when asked why he feels the STRA market is so attractive to Australian home owners.

“[But] it’s only to basically not have to deal with tenants from their perspective.”

Trevor Rawnsley, chief executive officer of the Australian Resident Accommodation Managers Association, believes this problem was created in parliament houses and council chambers across the country.

“Part of the increase in appeal of STRA has come from state and local governments imposing an increasing list of deterrents for long term rentals such as additional rates and taxes, and a long list of reforms and residential tenancy laws which swings the balance far too much in favour of the tenant and against the landlord,” he explains.

“Some landlords feel helpless when trying to manage a residential tenancy on their own,” he adds.

Like Mr Samaras’ estimation, Mr Rawnsley believes bad tenants are in some part culpable for the rise in Australian STRA uptake.

“A difficult tenant can be very costly and stressful for a private rental investor. By comparison, managing guests’ behaviour, damage, and payments is much simpler through STRA.”

Where to from here?

Tighter regulation of the STRA space has long been heralded as a silver bullet which would ideally bring the sector into line and subsequently free stock up for both the long-term rental market and potential sales. And with both rents and median house prices skyrocketing nationwide in the face of Australia’s desperate struggle for supply, many, including Per Capita’s Centre for Equitable Housing, believe greater regulation is essential.

But, is there a straightforward to solution to the STRA conundrum?

According to the findings of the Light as Air: Regulating Short Term Rentals in Australia report, current regulations in place limiting the number of nights STRAs can be made available to rent in both Sydney and Byron Bay are failing.

The report found 22 per cent of STRA listings in Sydney and 21 per cent in Byron Bay were booked in excess of 180 nights per year, despite legislation attempting to eradicate such lengthy temporary tenures.

In order to combat the rise of STRA and limit its potential impacts on the wider housing market, the Light as Air report provided several recommendations targeting at stemming the sector’s growth. These include:

• Short-term rental registries in each state and territory
• Data sharing requirements for STRA platforms
• State/territory STRA regulatory frameworks
• Statutory planning tools
• Council rate increases
• Enforcement mechanisms
• Emergency use requirements

However, despite urges for regulation of the STRA sector, recent findings from a Queensland government inquiry into the impacts of STRA on the long-term rental markets suggest other solutions are necessary.

Conducted independently from the state government by the University of Queensland (UoQ), the report concluded short-term rental properties have a “limited impact on rental affordability”.

UoQ also insisted any large-scale restrictions on the sector, including those recently proposed by the Melbourne City Council to implement night caps and registration fees, would “fail to account for the diverse nature of short-rental dynamics across Queensland”.

Speaking on the results of the report, Queensland’s Deputy Premier Steven Miles said the findings “emphasised the vital role of housing availability and supply in rental prices, highlighting the importance of having enough housing options”.

This is especially true with Australian borders reopening to temporary and permanent arrivals in a post-COVID-19 world.

Speaking on a recent episode of the Smart Property Investment Show, Matthew Tiller, head of research at LJ Hooker Group, stated: “What’s really required [for the property market] is the increase in supply to match that population growth.” This is especially true given forward estimates from the recent federal budget indicating 1 million new net arrivals onto Australian shores over the next four years.

This is a belief shared by Mr Samaras, who said there is no silver bullet to cure the property market’s pain, with new stock and mandates over who can purchase it his primary cures for the market’s woes.

“You’ve got a shortage of supply, which bumps prices up, interest rate rises, which bump prices up, [and] some offloading of stock, which creates a shortage of supply for rental stock,” he commented.

It appears the sentiment of increasing housing supply is one felt even at the peak of Australian politics. At last month’s national cabinet meeting, the nation’s leading political figures agreed to increase the National Housing Accord’s target of “well-located homes” in the next five years from 1 million, as previously outlined, to 1.2 million.

On top of this, the federal government committed $3 billion to a New Home Bonus aimed at incentivising the construction of these homes. The fund will be apportioned to states and territories that achieve more than their share of the target.

Prime Minister Anthony Albanese insisted “supply is key” in addressing the issues facing the national housing market.

However, he did not rule out the merits of treating STRA operators as if they were “running a business” much in the same way the Brisbane City Council did when they enacted a crackdown on holiday homes by enforcing 50 per cent higher council rates on property owners operating holiday homes.

Mr Samaras said operators who “don’t like” this way of wrangling the sector can “just rent the property out long term”.

With the financial allure of short-term rental leasing proving increasingly enticing for Australian property owners, especially at a time when interest rates have risen astronomically, it appears the path towards transforming many of these places onto the long-term rental market is not linear, assuming it exists at all.

But, if any path towards a healthier, stockier Australian property market does exist, it is undoubtedly forged by increasing supply across all property types, rather than hyper fixating on the impact of holiday rentals and other niche market sections.

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