House prices in some areas of Australia are more than 20% above pre-pandemic levels, and several cities have seen greater than 8% annual rent rises, even as the nation’s population growth stalled amid two years of border closures.
Experts say the situation is the result of several contributing factors, many of which predate the pandemic, such as a lack of investment in social and affordable housing and an increase in shorter-term rentals.
The past two years have also amplified other longer-term trends such as smaller household sizes, movement out of capital cities, a decreasing rental supply and pent-up demand for home ownership.
Apartment rents in some areas of metropolitan Melbourne fell almost 30% in 2020, but have since recovered almost all of that in the past 12 months, according to recent CoreLogic data. Tim Lawless, a research director at CoreLogic, says that border closures may have contributed to this initial drop due to fewer migrants, tourists and international students.
But the price recovery began well before the borders were opened as Australians chased what was now relatively affordable housing in inner cities.
Sales have also recovered from a brief pandemic blip, with 2021 seeing record housing turnover. There has been an almost 30% rise in house prices in greater Brisbane to May 2022, compared to a 15% rise for apartments.
“That weakness early in the pandemic was mostly emanating from the inner city high-density markets, which has resolved itself quite quickly,” Lawless said.
“And that [recovery] was being fueled by domestic rental demand away from houses towards units, simply because they were so much more affordable.
“Now that’s being magnified by a lot more by international students returning, overseas migrants coming back [and] more properties reverting to short-term tenancies as well.”
According to Dr Chris Martin, a senior research fellow at UNSW and co-author of a recent report into Covid’s impact on housing, rental supply in 2021 was more than 20% below the 2016-2019 average and has since gotten worse.
Martin says there are a number of reasons for the decline in supply, including increased purchases by owner-occupiers, properties listed for short term rentals and that a “lot of the ordinary turnover in tenancies hasn’t happened”.
“The rental market impacts of the pandemic and the aftermath of the pandemic have been varied and put new twists on what’s been a long running problem – not enough affordable rental housing, private market and social housing, for low-income people. That has been a chronic problem.”
Even as more people are chasing a smaller number of rentals, sales are also hitting new highs.
“Through 2021 we did see the number of home sales reach record highs. There were more than 600,000 homes sold. But that came after a period between 2015 through [to the] middle of 2019 where housing turnover was consistently falling,” says Lawless.
“A key factor driving housing values due to the pandemic has been household savings. We saw the household saving ratio spike to record highs during 2020.
“For anyone looking to borrow, you had this dual impact of interest rates falling to record lows, as well as [an] increased ability to [service loans].”
Annual population growth dropped from 1.5% in March 2020 to 0.1% in March 2021. Even though a lack of immigration contributed to this, domestic migration might have had a bigger impact on the housing market.
“The big twist during the pandemic were people who could work from home and went to bigger houses, further out from the cities, into the regions and even interstate … There’s been a big turnover in regional properties, sales of properties in the regions,” says Martin.
“That’s also contributed to renters in the regions, who may not have wanted to move, having a really hard time of it.”
The March 2021 quarter saw the largest flow away from the capital cities since the ABS began collecting data in 2001. The previous record was set in September 2020.
The average household size has been dropping for a century – from 4.5 people in 1911 to 2.6 by the 2016 census. One- and two-person households are now a majority of households.
This trend may have accelerated during the pandemic, as people tried to find more space and turned spare bedrooms into offices.
“Smaller household sizes have probably really amplified rental demand. And that is probably the best explanation as to why rental demand has increased,” says Lawless.
“That smaller household size, when you apply it across a population, means that rental demand has actually been amplified, despite the fact that closed borders have stemmed the level of rental demand from overseas.”
Even as the supply of private rentals has been under pressure, Martin says social housing has been on a “starvation diet” for more than 30 years.
“[Social housing] hasn’t grown, and it has fallen behind the housing needs of a growing community, whether by immigration or natural population growth. We have a growing population and part of that population needs low-cost rental housing. And we have a private rental sector that just doesn’t do it either.”
There was just a 9% growth in social housing stock between 2006 and 2020, according to a recent working paper from the UNSW City Futures Research Centre. This is despite a much larger increase in population (and homelessness) over that time.
The federal and some state governments have announced policies to build more social housing. But Martin says that may not be enough, and that governments should explore increased assistance, as well as rent control.
“Increased social housing can’t come fast enough to deal with [acute rental affordability] problems. So as much as other social housing is necessary, other measures are needed in these present circumstances.”
In the meantime, Lawless says newly opened borders may add further pressure to housing costs in some areas.
“Potentially we could see these rental demand pressures being amplified. We could see a reversal of this trend towards smaller houses.”