The Australian government has turned its attention to the issue of supermarket price gouging. With grocery giants recording strong profits amid growing concerns about the gap between supermarket prices and farmers’ earnings, a review of the food and grocery code of conduct has been announced. Prime Minister Anthony Albanese has offered additional powers to the Australian Competition & Consumer Commission (ACCC) to tackle this issue, suggesting that supermarkets not passing on savings to customers is “completely unacceptable.”
However, the price gouging narrative distracts from the underlying economic pressures contributing to inflation, most notably the housing market. The rental market in Australia is tight, and rents have increased significantly, contributing to financial stress among renters. The problem is exacerbated by the fact that renter households tend to be younger, have lower incomes, and less wealth than owner-occupiers, making them more vulnerable to rent increases.
The charts depicting Australia’s rental market show a clear trend of worsening affordability, with median rent values rising rapidly since late 2020. This has led to calls for overhauling the rental system, with broad agreement across the housing sector that the current situation is unsustainable. Tenants across major capital cities face steep price rises and eviction notices, pushing them to a breaking point.
To understand the problem, the numbers paint a harrowing tale:
Rental Inflation: Australia’s rental inflation rate has significantly increased. As of the December quarter, the national median rental price surged by 1.8%, reaching AUD 580 per week. This represents an 11.5% increase compared to the previous year, indicating that weekly rents are AUD 60 more expensive than in early 2023.
Compare those alarming rental figures to supermarket profits:
- Coles: The profit margins for Coles have been a topic of discussion, especially with the government inquiry into supermarket pricing practices. Coles posted an AUD 1.1 billion full-year profit in its most recent results.
- Woolworths: Woolworths’ supermarket gross margins rose to 30.7%, and its earnings-to-sales ratio increased to 5.9% as of the last reported period. Woolworths’ food business profit margins were at 5.4% in the last full year before the pandemic before hitting 6% last financial year.
While ensuring fair pricing in supermarkets is essential, it is crucial to note that even if consumers were to save 5% on their grocery bills, the amount would be minuscule compared to their annual rent expenditure. For instance, a 5% saving on a weekly grocery bill of AUD 150 amounts to just AUD 7.50 per week or AUD 390 per year, dwarfed by the additional rent costs.
While the government’s concern over supermarket pricing is valid, especially considering the impact on consumers and farmers alike, addressing the broader economic challenges is crucial. The rental market’s contribution to inflationary pressures cannot be ignored, as it directly affects a significant portion of the population.
The real issue at hand is housing affordability and the rental market’s role in exacerbating inflationary pressures. The focus on supermarket pricing, while important, should not overshadow the urgent need to address rental inflation. The government’s efforts must extend beyond the aisles of grocery stores to the heart of Australian homes, where the struggle to keep a roof over one’s head is becoming increasingly challenging.
So, how do you fix it?
The most glaringly obvious issue is a lack of supply. Australia needs more affordable housing to meet the demand. Australia doesn’t have enough housing for its growing population.
Fortunately, Australia isn’t the only country that has grappled with this problem before. There are other countries that have tried to solving their own housing crises:
- Germany: Germany has long been known for its stable rental market, thanks in part to its strong tenant protection laws. The country introduced a “rent brake” (Mietpreisbremse) in 2015, which limits rent increases in areas with tight housing markets. Landlords can only raise rents by up to 10% above the local average for new contracts, and there are restrictions on raising rents for existing tenants as well.
- Singapore: Singapore’s approach to housing is unique, with the government owning most of the land and providing a significant portion of housing through the Housing and Development Board (HDB). This public housing model keeps rents relatively affordable and stable. Additionally, Singapore has strict regulations on foreign property ownership, which helps prevent speculative investment from driving up prices.
- Finland: Finland has a strong social housing sector, with around one-fifth of Finns living in state-subsidized homes. The government also supports the construction of affordable rental housing through subsidies and tax incentives. These measures help to keep rental inflation in check and ensure that housing remains accessible to a wide range of income levels.
- Netherlands: The Dutch government regulates both social housing and private rental sectors. Social housing rents are controlled and linked to tenants’ incomes, while private rents can only be increased once a year by a percentage set by the government. The Netherlands also has a points system (woningwaarderingsstelsel) that determines the maximum allowable rent for a property based on its characteristics.
Of course, you have to tread carefully when you talk about government intervention.
Government intervention in housing markets can have both positive and negative impacts. Here are some potential downsides to consider:
- Market Distortions: Interventions can lead to distortions in the housing market, such as artificially inflating or deflating property values, which may not reflect the true supply and demand dynamics.
- Reduced Investment: Regulations perceived as too restrictive may deter private investment in the housing sector, potentially decreasing the overall housing supply.
- Complexity and Cost: Developing subsidised housing can be more expensive and complex due to the financing structures required, which may slow down the construction process.
- Unintended Consequences: Policies aimed at one aspect of the housing market can have unintended consequences on other parts, such as rental prices or the availability of affordable housing.
- Benefiting Lenders More Than Borrowers: Some interventions may inadvertently benefit lenders more than borrowers or prioritise the interests of builders over homeowners, which could negatively impact the market in the long run.
- Creating New Demand-Side Subsidies: Efforts to alleviate housing shortages by creating new demand-side subsidies could increase housing costs for all, harming those they intend to help.
The bottom line is Australia needs more housing and fast. An inquiry into the supermarkets might save Australians a pocketful of dollars, but unless we deal with the issue of housing availability and affordability, the real problem will persist.