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Supply, not landlords, behind the housing crisis

Australia’s housing crisis is being driven by supply issues rather than greedy landlords or rising interest rates, according to Reserve Bank of Australia (RBA) Assistant Governor Sarah Hunter

In a recent speech at the 100th anniversary of the Real Estate Institute of Australia (REIA), Dr Hunter highlighted the critical role of supply constraints in the ongoing housing crisis.

“The recent rapid growth in demand relative to supply was very clear,” Dr Hunter said. 

“But it also showed that new supply has yet to pick up – dwelling completions have trended down over the last five years.”

Dr Hunter revealed how various factors, including demographic changes and pandemic-induced shifts, have driven up demand for housing. 

Australia’s population growth, primarily driven by net overseas migration, continued to outpace that of other advanced economies, pushing the demand for housing higher. 

At the same time, the average household size has decreased, further straining the housing market.

“Understanding the changes in average household size is therefore important for understanding demand for housing,” she said.

Sarah Hunter is the assistant governor at the RBA.

At the moment, Dr Hunter said 27 million people lived in Australia, in about 11 million households.

The average number of people living in each home has dropped from 2.8 in the mid-1980s to about 2.5 now. 

“This may sound like a small change,” she said.

“But, if for some reason average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference.”

Dr Hunter said the ageing population and lower birth rates meant more older couples and singles also lived alone.

While demand surged, the supply side of the housing market has struggled to keep pace. 

Supply chain disruptions caused by COVID-19, shortages in materials and skilled labour, and lengthy approval processes have all contributed to the bottleneck in new housing construction.

“In the early days of the pandemic, supply chain disruptions significantly limited the sector’s ability to respond to increasing demand, which was partly linked to the HomeBuilder program,” Dr Hunter said. 

 “Materials, fixtures, fittings, and skilled labour were in short supply, and shipping delays significantly extended build timelines.”

Despite resolving many supply chain issues, the pipeline of projects remains elevated, and capacity constraints continue to bind. 

High construction costs have also deterred new projects, with prices for building materials and labour rising sharply.

“A significant portion of dwelling construction costs are the direct costs of building materials and labour,” Dr Hunter said. 

“In recent years these have risen sharply, and we do not expect them to fall back significantly. 

“Pandemic-related supply chain disruptions and competition for resources from other types of construction have pushed up prices by nearly 40 per cent since late 2019.”

Dr Hunter emphasised that while interest rates do impact new housing construction, they are not the primary driver of current rental market conditions. 

“There is little to no evidence of direct pass-through to rents from higher interest costs in the short-term,” she stated, adding that market conditions, particularly the vacancy rate, explain most of the movement in market rents.

Dr Hunter said structural changes were needed to alleviate the housing market squeeze. 

“An easing in zoning and planning restrictions and a streamlining of the approval process can reduce these costs, and all other things equal, these changes would improve project viability and increase supply over time,” she suggested.

She also warned that the pressure on rents and prices will persist until new supply caught up with demand. 

“It will not be a quick fix,” Dr Hunter said.

“Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online,” she cautioned. 

“We expect this response to take some time to materialise, given the current level of new dwelling approvals and the information from liaison that many projects are still not viable.”

“In the meantime, we expect residential construction activity to remain relatively subdued.”

REIA President Leanne Pilkington, welcomed Dr Hunter’s assessment. 

“It was great to hear from Dr Hunter who has had many years of research experience in the housing sector both at Oxford Economics and now at the RBA,” she said.

“She has pointed out that the level of demand relative to the stock of properties available is the key driver for market rents. 

“In other words, the low vacancy rates explain most of the movement in market rents.

“Importantly she found that there is little to no evidence of direct pass-through to rents from higher interest costs.

“The observation that market rents and interest rates move together appears to be a case of correlation, rather than interest rate rises causing rents to increase.

“This is contrary to much of the public debate about greedy landlords simply passing on higher mortgage costs and should stop the calls for rent freezes and other market interventions which do not address the problem and indeed exacerbate it.”

Dr Pilkington also welcomed Dr Hunter’s suggestions on correcting the supply and demand imbalances, but also noted there is not a quick fix.

“Amongst other factors that will address the imbalance between supply and demand are: average household size could increase; the pace of growth in construction costs could moderate; developers may respond with new supply; Federal and state government initiatives that streamline the approvals and build process will reduce costs,” she said.

“It is clear that there is no quick fix to what is a supply problem, it is also clear that government’s across all three tiers need to do their bit to address the constraints and this includes encouraging private investment.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.