Key takeaways
Rental markets have tightened substantially with vacancy rates holding around 1% and rental growth surging.
Nationally, rents have jumped 32.4% since March 2020, adding approximately $150/week to the median dwelling rent.
Despite unprecedented housing demand, a supply response is yet to be seen.
Dwelling completions have held relatively flat through the pandemic to-date, with supply chain constraints, materials and labour shortages, and a surge in construction costs creating a challenging environment for delivering new housing supply.
It was four years ago when the World Health Organisation declared COVID-19 a worldwide pandemic.
Since that time economic trends, including housing metrics, have been on a roller coaster ride.
Although lockdowns and the uncertainty of vaccination programs are well behind us, the legacy of COVID will be with us for a long time yet.
This is the second of a series of articles that provides a retrospective of housing and peripheral economic and demographic trends through the pandemic to date.
You can read the first part here.
Rental markets
Rental vacancy rates trended sharply lower through the pandemic and were holding well below average levels at the end of last year.
Such a severe tightening in rental supply can be attributed to a combination of smaller households that amplified rental demand, followed by a surge in net overseas migration once international borders reopened.
The average household size reduced from 2.55 persons in late 2020 to a historic low of 2.48 people in August 2022.
Although the reduction in average household size may not seem significant, when applied across the population, smaller households are estimated to have added approximately 120,000 households to overall housing demand.
The diminishment in average household size helps to explain why the rental vacancy rate plunged despite flat population growth and closed borders through the pandemic.
In line with such tight rental vacancies, rental values have surged across the country, with national rents rising by almost a third since the onset of the pandemic (+32.4%).
In contrast, the four years prior to the onset of COVID saw national rents rise by only 4.6%.
The median rental value nationally is now about $150 higher per week than at the onset of COVID in March 2020.
The most significant rise in rents has been recorded across Perth where weekly rents are up 53.8% through the pandemic to date, adding approximately $226/week to the median rental value.
Early in the pandemic house rents were rising substantially faster than unit rents, however, this trend has reversed since international borders re-opened, with unit rents consistently outpacing house rents since early 2022.
Through the pandemic to date, national house rents have increased by 33.4% and unit rents are up 30.4%.
Supply response
Despite a surge in dwelling approvals and commencements, the number of completed homes has not increased, creating a significant undersupply of newly built housing amid a demand shock.
The pandemic saw several key supply-side initiatives, including the HomeBuilder program and an objective from the federal government to see 1.2 million ‘well-located’ new homes delivered over the five years ending June 2029.
The HomeBuilder program was a $25,000 grant available for building a new home or substantially renovating an existing home between June 4th and December 31st 2020.
The grant was extended until March 31st but scaled down to a $15,000 grant.
138,101 HomeBuilder grants were awarded with a total value of $2.52 billion, exceeding Treasury’s initial forecast by 411% in number and 275% by value.
Despite the surge in approvals and commencements during the HomeBuilder program, the number of dwellings completed remains well below pre-pandemic levels and overall housing supply remains constrained.
There have been a range of challenges for the building sector in delivering new housing supply to the market:
- The residential construction sector become ‘overheated’ due to the increase in construction activity associated with HomeBuilder program, creating supply-side issues for land, materials and labour.
- Broader supply chain issues became significant with interruptions to logistics, materials availability and labour supply associated with the pandemic.
- Construction costs increased by approximately 27% since March 2020, according to the Cordell Construction Cost Index. This unprecedented jump in building costs created significant liquidity pressures for the residential construction sector, eroding profitability and sending many builders into administration.
- With ongoing capacity constraints and margin pressures, the time it takes to build a new dwelling has blown out, moving from a pre-pandemic average of 2.2 quarters to deliver a completed house to 3.1 quarters, and larger increases for higher density dwellings. Given the low number of completions to date, it’s likely these figures will increase materially over the coming year.
Watch out for the next article in this series in the next few days.
