In recent months, several substantial reports and policy documents have been released to support the emerging community debate on housing supply. The debate’s urgency has been accentuated by the shortfall in housing supply in an environment where underlying demand is strong (based on household formation rates, not affordability).
The pressure on supply is evident in some small increases in housing prices in recent months. The sharp increase in interest rates from May 2022 impacts affordability (loan service to income) and has driven the current decline in prices. Whether this reflects a more stable situation or a “dead cat bounce”, only time will tell.
Another factor impacting demand has been the reduction in average household size over the course of the pandemic, as more people sought separate accommodation.
Despite a stable population during that period, RBA research shows the average number of people living in each household declined from around 2.9 in the mid-1980s to around 2.6 since the early 2000s. More recently, the Average Household Size declined to historical lows, just below 2.5 people per household.
This reduction in household size particularly since COVID 19 has been estimated to have generated demand for some 140,000 additional dwellings. That is a lot of additional housing and construction activity.
In addition to the demand-side pressures from falling household sizes, the reopening of borders has resulted in net migration increasing. This is a combination of returning international students and additional workers needed to address what are now observably acute labour shortages in the wider economy.
All this demand has delivered record low rental vacancy rates. Unsurprisingly, rents have risen strongly over the past year.
Source: CoreLogic Quarterly Rental Review July 2023
In its quarterly rental review released in July 2023, CoreLogic commented:
“The pace of quarterly rental growth continued to accelerate through April (2.8%) and May (2.8%) before easing to 2.5% over the three months to June.” This has seen
“…national rents rise 9.7% over the 2022-23 financial year, down from the record 10.2% lift seen over the 2022 calendar year”.
“On the supply side, rental listings remain well below the previous five-year average, with a national shortfall of approximately -32.4% or 47,500 rental listings recorded over the four weeks to June 3rd. Despite the continued shortage in listings, national vacancy rates eased slightly over the quarter, from 1.1% in March, to 1.2% in June, but remain well below the pre-Covid decade average (3.3%).”
This is where we get to the pointiest end of the discussion. This increase in rents is one of the major contributors to inflation.
Given the squeeze on household budgets, these rental increases are proving challenging. With a third of the population renting, the steep rise in rental costs has prompted a myriad of policy proposals, ranging from rent freezes, through to fast tracking planning arrangements.
In his final parliamentary appearance, retiring RBA governor Philip Lowe commented that imposing rent controls to ease the housing crisis would make the shortage of homes even worse, over the long term. His point? The only solution is to build more houses:
“The solution has to be putting in place a structure that makes the supply side of the housing market more flexible.
“And that means zoning and planning deregulation, and it means … state and local governments being part of the solution.”
Essentially, this was the focus of the National Cabinet meeting held 16th August 2023.
As part of this special edition on housing, we look at the national policy response and the range of research exploring many facets of the problem that is achieving more housing supply.
