In his appearance before the Senate estimates committee earlier this week, RBA Governor Philip Lowe was repeatedly quizzed on how to take pressure off the housing market, which is currently in the midst of the worst rental crisis in well over a generation.
Lowe responded that: “The solution to all these problems in the housing market is supply, supply, supply.”
Lowe went on to add that “higher prices lead people to economise on housing”. In short, more
people would be forced to move home, forego moving out or move into some form of shadehouses due to higher rental costs.
Lowe is correct in that additional housing supply is part of the equation, but how much more supply can Australia’s construction sector realistically deliver and how does that increase in supply balance out with the increase in demand.
Construction Sector Capacity
According to data from the OECD, Australia has more construction workers per capita than the vast majority of the developed world. Currently 1 in 21 Australians are employed in the construction sector. It’s worth noting that this metric is not based on workers, but all Australians.
Australia employs 34.3 per cent more people per capita in the construction sector than in the United States and 14.9 per cent more workers than Canada, which also shares Australia’s high population growth model.
Despite the recent drop in building approvals, the number of homes under construction nationally is just 1.6 per cent below the all-time record highs hit in the September quarter of 2022. In terms of houses under construction, there are 47.8 per cent or 34,000 more currently underway than compared with the previous peak recorded in June 2018.
Another way of looking at how the capacity of the construction sector is being used is the number of construction workers per residential dwelling currently under construction. Currently there are 5.52 workers per dwelling under construction, which is significantly below the average of 6.81 which has been recorded since the turn of the new millennium.
It is however worth noting that part of the reason why the number of homes under construction is so elevated is due to material and labour shortages. But this also serves to illustrate that the construction sector has been operating near peak capacity for quite some time, since pandemic driven demand combined with various government stimulus programs such as first homebuyer grants and Home builder.
The Demand Side
Since the pandemic first arrived on Australia’s shores in March of 2020, the level of demand for rental properties has been on quite the rollercoaster ride. At first the challenges and uncertainty presented by the pandemic saw more Australians return to living at home or abandon share-houses in favour of other living arrangements. This saw the demand for homes nationally fall by 162,000 based on the average household size, reducing pressures on the rental market.
But as the pandemic dragged on, more and more Australians wanted a place of their own. Between Q3 2020 and Q2 2022, the decline in the size of the average household saw demand homes rise by 288,000. By the time it was all balanced out demand for homes had risen significantly before the nation’s international borders reopened.
Over the past three years migration has been something of a double-edged sword for capital city rental markets. Between March 2020 and December 2021, the number of temporary visa holders in categories likely to require some form of housing fell by 328,000. Based on the average Australian household size demand for homes fell by 131,000.
But once borders reopened migration went from a major headwind placing significant downward pressure on rents and broader rental demand, to a tailwind, further boosting demand for rentals.
In the recent federal budget, the Albanese government’s pencilled in a net migration figure of
400,000 for 2022-23 and 315,000 in 2023-24. To put this into perspective, the previous record high for net migration in a single year was 300,000 in 2009, under the Rudd government.
The challenge presented high levels of population growth and its impact on the housing market was summed up by Governor Lowe earlier this week:
“The population is increasing by 2 per cent this year, are there 2 per cent more houses? No,”
The Balance
Ultimately, outcomes within the rental market will be heavily influenced by the equilibrium between supply and demand. The construction sector can do its level best to add to housing supply as swiftly as its able, but there are limits to its capacity at the best of times. At the worst of times which may be on the horizon due to higher interest rates and expensive barriers to entry for a new build, it will build even less new homes than that.
According to forecasts from the RBA population growth is set to outstrip growth in housing stock until 2025, putting further pressure on the rental market and housing more broadly.
Lowe’s comments that Australia’s housing issues need to be solved with “supply, supply, supply” are at their core partially correct.
But ultimately its more complex than that, the demand side is also a major part of the equation which needs to be carefully considered, particularly given the high stakes of getting it wrong amid the worst rental crisis in decades.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator