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The big reason Australia has a housing shortage

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Finding housing has been difficult for many Australians, with far fewer rental housing available than ever since 2003 and the price of secured homes rising rapidly. how did we get here

To understand the housing shortage and how it will be resolved, we need to delve into how the pandemic has shaped and changed the housing market across the country.

Covid-19 has caused divergence in the rental market

When the COVID-19 pandemic began, the closure of borders and restrictions on the movement of some people from locked cities to rural areas created a significant divergence in the housing market landscape.

The rental market is where housing shortages inevitably emerge.

In most parts of Australia, finding rental properties has become very difficult and even more expensive.Photo: Getty

In rural areas, additional demand from city movers has made housing difficult to find. Rental vacancies plummeted and prices soared.

In contrast, reduced demand has made it much easier to find rental properties in our cities, particularly Melbourne and Sydney.

However, over the past year, rental market conditions have tightened significantly in cities across Australia. as a result, Rents are now rising significantly across the country.

As we enter 2023, rental market pressures and housing shortages will be worse than before the pandemic. Rental vacancy rates are half of the levels seen in early 2020.

Border closures drained people, but population growth boosted demand for housing

Before the pandemic, international arrivals totaled about 2% of the population each year, and departures were at half that level.

As a result, overseas migration has increased Australia’s population by about 1% per year.

When the pandemic hit, borders were closed, but foreigners were allowed to return home.

In Australia, the number of people leaving the country has exceeded the number of people returning, resulting in a decline in the population.

At the same time, people continued to be born and Australia’s population grew, albeit at a slower pace than when the borders were opened.

In total, June 2022 population is 344,000 more than March 2020.

Given that a typical household size is 2.5 people, this population growth has increased housing demand by about 140,000 units over the past two years.

This housing demand increase was half of what it would normally be. Pre-Covid, population growth increased housing demand by more than 150,000 units a year.

Pandemic disrupted housing construction

At the same time, the number of new home completions has declined during the pandemic.

The massive government support for the construction industry, such as HomeBuilder, has had a major impact on the number of homes built (and still under construction).

However, this was offset by reduced unit construction. Construction of the units took much longer, and uncertainty about demand and the economic environment has delayed many projects.

More recently, global supply disruptions have significantly increased construction costs and reduced the viability of new housing developments.

Nevertheless, from March 2020 to June 2022, about 400,000 new homes were built.

So, assuming about 140,000 units are needed for population growth over this period, there will be an additional 260,000 new housing units remaining.

Investors sold rental properties at high rates

One aspect of the housing market boom during the pandemic is that it was driven by home buyers.

Investors have taken the opportunity to sell properties, partly because of the uncertainty in rental demand, but partly because rising house prices have often resulted in solid capital gains.

Towards the end of 2021, approximately 25% of home sales will consist of previously rented properties. This compares to pre-pandemic, when about 15% of sales were from investment properties.

But it had little impact on the housing shortage, as the first homebuyers bought these homes

Investor sales reduced the supply of rental properties, but probably didn’t have a significant impact on the housing shortage.

Many of those buying these former rental properties were first-time homebuyers, and rental demand declined.

A combination of government incentives and low borrowing costs has brought more first-time buyers into the market than at any time since 2009.

A significant number of investment properties have moved from being rented to being owned by the first homebuyer. This has definitely impacted the rental market. Because first homebuyers tend to be young, wealthy renters. Those remaining in the rental market will feel the effects of a tight market more acutely.

However, renters and first-time homebuyers have roughly the same household size, so there is no shortage of housing.

The 2021 Census also reported fewer vacant homes than five years ago, despite stories that lockdowns have prompted city dwellers to buy rural villas.

This suggests that the second (vacant) housing increase is not a major cause of the housing shortage.

Smaller households have greatly increased the number of houses they need

In response to the pandemic, people have spread greatly.

With lockdowns and remote work, people needed more space for their home offices and wanted larger residences with more outdoor space.

Falling rents for apartments, especially in inner-city areas, and a decline in the attractiveness of share houses meant especially for small rental households.

Census data show a significant increase in the percentage of households with only one person in the household from 2016 to mid-2021. Few households had three or more members.

Overall, the average household size decreased from 2.59 to 2.55. This may not sound like much, but it would require an additional 160,000 dwellings to accommodate the population.

This additional housing demand does not account for all new homes, but it is underestimated as it is based on mid-pandemic data.

Clearly, the main reason for the current housing shortage, especially for rental housing, is small households.

When will the housing shortage end?

The shift to smaller households during the pandemic was driven by two factors.

The first is lifestyle changes due to the rise of remote work due to the pandemic and more time spent at home.

Second, lower city center rents have given people access to space they couldn’t afford before.

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Lifestyle changes and the first element of remote work are almost here, but rent cuts are not.

As rents continue to rise sharply (up 6.7% nationally in 2022), rising costs are driving more renters to share homes and renters who can leave family homes. less people.

Similarly, rising mortgage rates and general inflation will cause homeowners to rent spare rooms.

This adjustment will come slowly as housing costs continue to rise.

And this adjustment is necessary. As international migration returns to pre-pandemic levels, new home construction will only keep up with population growth.

Evidence shows this will be a painful correction for the housing market in 2023.

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