Australia is grappling with a severe housing and rental crisis that shows no signs of abating soon. The rental market, particularly for units, has surpassed pre-pandemic levels, exacerbating affordability issues across the country.

Current Rental Market Trends

Recent reports indicate a slight reprieve for Australian renters as rental growth has eased and vacancy rates have increased over the past few months. From a record low of 1.09 per cent in February, the national rental vacancy rate rose to 1.42 per cent by June. Various property analysts have observed a similar trend of softening rental growth alongside these rising vacancy rates.

This moderation in rental market dynamics coincides with a slowdown in net overseas migration, which peaked in the September quarter of 2023 at an annual rate of 564,500. The impact of reduced migration has been most pronounced in the unit markets of Australia’s largest cities, contributing to a notable slowdown in rental price increases.

Challenges of Rental Affordability

Despite these recent developments, rental affordability in Australia remains at its lowest recorded levels. According to recent findings, households with a median income of $111,000 can now afford to rent only a smaller proportion of available properties than in any year since data collection began in 2008. Unlike mortgage borrowing, which can be leveraged against assets, rental prices are closely tied to household incomes, which limits the extent to which rents can rise.

Supply and Demand Dynamics

While there has been some relief in rental growth and vacancy rates, the situation remains precarious for tenants. As of June, the national vacancy rate remains significantly lower—43 per cent—than pre-pandemic levels. This persistent supply-demand imbalance lies at the heart of Australia’s ongoing rental crisis.

Recent data from the Australian Bureau of Statistics (ABS) underscores this challenge, revealing that only 13,500 new homes were approved for construction in May—far below the 20,000 monthly approvals needed to meet the federal government’s target of 1.2 million new homes over five years. Annual approvals are similarly insufficient, with only 163,800 homes approved for construction in the year to May, well short of the annual target of 240,000.

Economic and Population Growth Factors

Australia’s rapid population growth, driven primarily by immigration, continues to exacerbate the rental market’s supply-demand imbalance. This structural housing shortage originated when net overseas migration surged in the mid-2000s. While the shortage briefly diminished during the pandemic-induced border closures, it resumed as nearly one million net migrants arrived over the subsequent two years.

The current housing shortfall in Australia stands at approximately 200,000 dwellings, a figure expected to increase as population growth outpaces housing construction. Should the recent decline in average household size persist, this shortfall could grow to 300,000 dwellings—significantly higher than pre-2015 levels.

Addressing the Crisis: Policy Considerations

To effectively address Australia’s housing and rental crisis, policymakers could seriously consider reducing net overseas migration. The 2023 Intergenerational Report forecasts continued high migration rates, projecting an annual average of 235,000 net migrants and a population of 40.5 million within 39 years. Such projections suggest that without significant adjustments, Australia will remain in a perpetual housing shortage, perpetuating upward pressure on rents.

Reducing net overseas migration to a level aligned with the nation’s capacity to build housing and infrastructure is crucial. Failure to do so will prolong the current imbalance between housing supply and demand, making housing affordability increasingly unattainable for many Australians.

Australia’s rental crisis is a multifaceted issue driven by persistent supply constraints and robust population growth. While recent data indicates some easing in rental market pressures, the overall outlook remains challenging. Addressing these challenges requires decisive policy actions, particularly in managing population growth through prudent migration policies. Only through such measures can Australia hope to alleviate its housing and rental affordability crisis and ensure sustainable housing solutions for its citizens.