Low-income households in Australia are paying up to 85% of their income on rent, reinforcing calls for policy reform to address rental and housing affordability.

Under current market conditions, the Rental Affordability Index (RAI) – released in partnership by National Shelter, Community Sector Banking and SGS Economics & Planning – reveals low-income households typically need to pay 50-85% of their income on rent.

Ellen Witte, an associate at SGS Economics & Planning, said it is generally accepted that a household is in housing stress if it pays more than 30% of its income on rent. She told Your Investment Property’s sister title Australian Broker that this could have alarming knock-on consequences on the broader economy and the Australian quality of life.

“When housing stress starts to occur, it starts to impact on the wider health and well-being of households,” Witte said. 

“Households will have limited opportunity to spend income on food, bills, health and education. It is not only having an impact on the current generation, but even on the children of these rental households. Their children may have less opportunity for education and this may again impact of their future ability to earn incomes once they are adults.”

According to the index, Sydney continues to be the least affordable of the metro areas. However, affordability levels have stabilised in the harbour city in recent years. Sydney was followed by Hobart, Brisbane, and Adelaide. Perth is the most affordable of the metro areas studied in the RAI.

Wittes said the rental affordability crisis has largely been driven by an increase in demand.

“We really saw the affordability crisis starting to develop from the early 2000s onwards. For the first time in decades we have seen demand for housing outpace new supply of dwellings,” she told Australian Broker.

“The second thing we have seen is the introduction of the 50% reduction of the capital gains tax. This has attracted a surge of investment into the housing market and pushing out first home buyers.”

She said there needs to be “drastic” changes to address the problem.

“I don’t think there is a simple solution; it needs some drastic structural changes. The supply of housing needs to be pushed up. 

“Also, importantly, there needs to be an increase in affordable housing. Growing the community housing sector will really help to address the issues for the lowest income households. 

“In addition to that, there are issues around capital gains tax in combination with negative gearing. We don’t say it should all be completely abolished but there is a need to change those policy levers to make the environment more attractive to homebuyers who actually own and live in their houses,” she told Australian Broker.

The Labor Party has announced that it will work to introduce minimum national rental standards if it wins the upcoming election