Australia has been facing a rental housing shortage for several years now.
This has led to increased competition for available homes, driving up rentals and making it increasingly difficult for many Australians to afford a place to live.
But, how did we get here?
The Covid-19 pandemic caused a divergence in the rental market
The COVID-19 pandemic has had a profound impact on the global economy and has resulted in a significant divergence in the rental market.
The sudden shift to remote work and the economic slowdown have resulted in changes in demand for rental properties, leading to shifts in the supply and demand equation.
Mr Paul Ryan, Economist at REA shared his insights:
"At the start of the Covid pandemic, the closure of borders and restricted movement of some people, from locked-down cities to regional areas, created a large divergence in housing market conditions.
Rental markets are where housing shortages inevitably appear.
In regional areas, additional demand from city-movers made housing difficult to find. Rental vacancy rates plummeted and prices soared.
By contrast, lower demand made it much easier to find rental accommodation in our cities – particularly in Melbourne and Sydney."
Over the past year, rental market conditions have tightened considerably in cities across Australia.
As a result, rents are now growing strongly all across the country.
Going into 2023, rental market pressures – and housing shortages – are more acute than before the pandemic.
In fact, rental vacancy rates are half the levels seen in early 2020.
Population growth increased housing demand
Prior to the pandemic, overseas arrivals totalled about 2% of the population each year, with departures half that level.
So, overseas migration increased Australia’s population by about 1% a year.
Eventually, when the pandemic hit, international borders were closed but expats were able to return home.
In Australia, the number leaving outnumbered those returning, reducing our population.
At the same time, people continued to be born and Australia’s population increased, albeit at a slower pace than when borders were open.
In total, the population was 344,000 higher in June 2022 than in March 2020.
Mr Ryan commented:
"Given the typical household size of two-and-a-half people, this population growth increased housing demand by about 140,000 dwellings over those two years.
This increase in housing demand was half the normal rate.
Before Covid, population growth increased housing demand by more than 150,000 dwellings a year."
The pandemic disrupted dwelling construction
During the pandemic, fewer new dwellings were completed.
Significant government support for the construction industry, such as HomeBuilder, had a large effect on the increased number of houses that were constructed (and are still under construction).
But this was offset by reduced unit construction.
Unit construction has much longer construction times, and uncertainty about demand and the economic environment delayed many projects.
Mr Ryan further commented:
"More recently, global supply disruptions have significantly increased the cost of construction and reduced the viability of new dwelling developments.
Nevertheless, from March 2020 to June 2022, almost 400,000 new homes were built."
So, if roughly 140,000 of these were needed for population increases over this period, that leaves another 260,000 new dwellings.
So why is there still a shortage of housing?
Rental properties are being sold at higher rates
One of the aspects of the housing market boom during the pandemic was that it was driven by owner-occupier buyers.
Investors took the opportunity to sell off properties, in part due to uncertainty about rental demand but also because, in many cases, rising home prices provided solid capital gains.
At the end of 2021, about 25% of home sales comprised previously rented properties.
This compares to before the pandemic when about 15% of sales were investment properties.
Of course, this action by investors was very shortsighted.
Sure their properties increased in value - that's what they were meant to do.
But many missed the bulk of the "once in a generation" property boom of 2020-21.
And first-home buyers bought these homes
Many of the people buying these former rental properties were first-home buyers - which reduced rental demand.
A combination of government incentives and low borrowing costs brought more first-time buyers into the market than at any time since 2009 – about 100,000 more than in previous years.
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Mr Ryan explained:
"So many investor properties moved from being rented to being owned by first-home buyers.
This undoubtedly had an effect on the rental market because first-home buyers tend to be younger, wealthier renters.
Those remaining in the rental market will be feeling the effects of the tight market more acutely.
But renters and first-home buyers have similar household sizes, so this hasn’t affected the shortage of homes.
And despite anecdotes that lockdowns prompted city-dwellers to buy up regional holiday homes, the 2021 Census reported fewer vacant dwellings than was the case five years earlier."
Smaller households significantly increased the number of homes we need
People needed more space for home offices and wanted larger dwellings with more outdoor space because of lockdowns and remote work.
Falling rents, particularly for inner-city apartments, and share houses losing their appeal meant smaller renting households in particular.
Census data shows that the share of households with just one person in them increased significantly from 2016 to mid-2021.
There were fewer households with three or more people.
Mr Ryan further explained:
"In aggregate, the average household size fell from 2.59 to 2.55.
This may not sound like much – but it translates to needing 160,000 more dwellings to house the population.
While this additional housing demand does not account for all newly constructed dwellings, it is an under-estimate as it is based on data halfway through the pandemic.
It seems clear that smaller households – for renters in particular – is the key reason for the current housing shortage."
The core of our housing shortage – not enough land for sale
According to the HIA, a shortage of land for sale is at the core of this crisis.
HIA Senior Economist Tom Devitt explained:
“The volume of residential land transactions has fallen 37 per cent over the 12 months to March 2023.
This will see the volume of new home commencements slow over the next year.
An acute shortage of available land saw the price increase by 23 per cent over the three years from March 2020 to March 2023.
This compares to just a 5 per cent increase in the three years before that."
Devitt said this land shortage continues to drive up prices despite the sharpest increase in interest rates in over 30 years and will weigh on home-building activity in the coming years.
“As the market begins to normalise from the shocks in recent years, it is expected that both sales and prices will return to their historical trend. This depends on the government’s ability to adequately plan its land release pipeline, which in turn depends on the availability of data across all stages of land release.
“On average, it takes ten years to move land through the seven stages of land release.
“Decisions made today about land release can be expected to affect housing supply ten years from now.
“The time it takes to progress from a vacant block of land to a block that is shovel-ready with titles could be a major roadblock to the government’s plan to build a million homes over the next five years” concluded Mr Devitt.
CoreLogic Economist Kaytlin Ezzy said:
“Although the rate tightening cycle has seen some capitals record mild declines in recent months, land prices overall have remained fairly resilient, thanks to the shortfall in available land supply.
While sales numbers have eased significantly from the peak volumes seen during the HomeBuilder scheme, it will take some time before we see a more notable recovery in supply levels.
Until then, we can expect land prices will remain elevated, dwelling approvals will continue to track below average, and house commencements will continue easing,"
The chart below shows the median price of residential land in the capital cities during the March Quarter of 2023 and compares them to median prices recorded in the same period a decade ago.
On a per square metre basis:
- Sydney continues to be the most expensive of the capital cities, with median land prices of $1,827 per square metre. To give some perspective, ten years ago Sydney’s lot price per square metre was 19 per cent higher than the average of all capital cities; now it’s nearly twice the average.
- Melbourne is the second most expensive, at $1,058 per square metre.
- Greater Brisbane and Greater Perth recorded similar average prices per square metre in the March Quarter 2023, of $715 and $725 respectively.
- Adelaide and Hobart continue to have the lowest per square metre prices, at $528 and $482 respectively.
So when will this end?
The shift towards smaller households throughout the pandemic was driven by two things:
- a change in lifestyles brought about by the pandemic with the rise of remote work and more time spent in our homes.
- second, it was facilitated by cheaper rents in inner city areas, which allowed people to have the space they could not previously afford.
Well, changing lifestyles and remote work is mostly here to stay.
However, cheaper rents are not.
Mr Ryan said:
"As rents continue to increase sharply – they were up 6.7% nationally over 2022 – more renters will be pushed to share their homes by rising costs, and fewer prospective renters will be able to afford leaving the family home.
Similarly, higher mortgage rates and general inflation will lead to homeowners leasing spare rooms.
This adjustment will happen slowly, as housing costs continue to increase.
And this adjustment is needed, since with overseas migration returning to pre-pandemic levels, new home construction will only just keep up with population increases.
The evidence points to this being a painful adjustment for the housing market in 2023."
