In today's Pulse article, Head of Research Eliza Owen discusses how the performance of dwelling values and rental demand influences Australia's current housing supply.
The current state of the Australian housing market is often characterised as undersupplied. Supply is at the centre of government policy approaches to housing, and the latest reporting from Housing Australia estimates a supply shortfall of over 100,000 dwellings to the end of 2028.
Despite a purported lack of housing, some dwelling markets are declining in value, which is often explained by an ‘oversupply’ of housing. In Melbourne for example, home values declined -0.9% in the three months to January. This has occurred alongside a rise in total listing numbers, giving prospective buyers more choice, and therefore more leverage to negotiate prices down.
So how are these two ideas reconciled?
Demand for housing in Melbourne is seemingly sluggish and listings are accumulating, while at the same time the political discourse about the critical undersupply of housing is louder than ever.
The answer is in recognising that there is a difference between the market for purchasing housing and the need for somewhere to live. Terms around supply and demand may be conflated across the two conversations, but they can be distinct from each other.
The market for purchasing housing can be characterised as the amount of housing available for sale, and the number of people interested in buying. The desire to buy housing is shaped by things like credit conditions, consumer confidence, income, savings, capital growth prospects, rent return and tax settings. But whether or not housing looks attractive to buy as an asset is different to needing somewhere to live.
Returning to Melbourne as an example, CoreLogic estimates there were 81,203 dwelling sales in the 2023 calendar year, which represents the market demand of those that were willing and able to buy housing. But the amount of ‘supply’, or the number of new listings added to the market in the period was even higher, at over 90,000. In this sense, the market was indeed oversupplied in 2023, which caused purchasing values to come down slightly.
But demand from the perspective of people needing somewhere to live is very different in Melbourne. Population growth in Melbourne is likely to have increased markedly in 2023, with the city historically attracting around 30% of the country’s net overseas migration, according to ABS regional population data. In November last year, rental vacancy rates across Melbourne were less than 1%, compared to a historic five-year average of 2.2%. Rent values in Melbourne increased 10.7% in 2023. Homes Victoria data suggests state-wide, there was a 4.7% increase in new housing applicants resulting from homelessness in the year to June. Each of these factors points to increased housing demand, even if the people who need these homes are not in a position to buy.
In fact, private rental market values can be a pretty good proxy for the more fundamental need for housing, because the private rental market is the most common fall back for people who cannot, or are not willing, to buy housing. This helps to explain why changes in rent values and home purchasing values have differed over the past few years. The change in purchase values fluctuated amid changes in policy settings, while rents moved consistently higher.
Rolling annual change in rents versus purchase values - National, dwellings
So what does it mean when the fundamental demand for housing is strong, but purchasing demand is low? And what can we glean from slowing capital growth, and purchase values falling in some markets, while rent values continue to rise at persistently strong levels?
It probably means that buyer demand will be particularly sensitive to changes in interest rates, or other aspects of demand that make that make it easier to go from renting to owning. For example, a reduction in mortgage rates, or the serviceability assessment buffer, would increase borrowing capacity for lower income households, boosting the number of buyers in the market. Value falls in the Melbourne market will also start to flatten out once prices are low enough to entice buyers.
Remembering that supply and demand of dwellings can mean different things from a market perspective and a social perspective is also important. It helps to avoid conflating a decline in dwelling values as a step toward solving the housing crisis, and acknowledging that some households will never be in the market to buy. In these cases, it is important to have a consistent supply of social housing outside of market fluctuations, to ensure adequate housing for those that just need somewhere to live.