The National Housing Finance & Investment Corporation (NHFIC) has released its “first flagship housing report”, which claims that almost 200,000 homes will be freed up over the next two years because Australia’s international borders have been closed to immigrants due to the pandemic. It expects this to put downward pressure on rents, particularly in the Sydney and Melbourne apartment markets:
The global COVID-19 pandemic has caused the largest shock to population growth since early last century, triggering a forecast fall in new demand for housing of 286,000 dwellings over the next five years.
Despite the impacts of the pandemic, a recovery in construction activity from the COVID-19 recession is underway – led by detached housing – with total net additions expected to rise to 181,000 in 2021 from 170,000 in 2020 on the back of the monetary and Federal and State Government fiscal stimulus put in place this year.
Federal and state government stimulus is supporting supply by encouraging construction activity in the short term, but the lower demand for new housing is expected over the medium to longer term, with net additions likely to fall and then recover to around 148,000 in 2025. Weakness in net apartment additions will potentially extend to 2025, when 27,000 new dwellings are expected, similar to levels seen prior to the apartment boom.
Despite record levels of residential construction over the years prior to COVID-19, supply outpaced demand by only 4,500 dwellings (on average) for the years 2017-2019. The shorter term period where new supply exceeds new demand can be seen as a catch up for much longer periods of under supply in the earlier 2000s.
New supply is expected to exceed new demand by around 127,000 dwellings in 2021, and 68,000 dwellings in 2022. Cumulative new supply is expected to be around 93,000 higher than new demand by 2025, although sensitivity analysis demonstrates this could halve with slightly more optimistic population growth assumptions…
Projections suggest rental affordability will improve out to 2022, particularly in more densely populated eastern seaboard cities, as there are fewer households forming to soak up new supply. With new supply expected to exceed new demand over the near term, there is likely to be downward pressure on rents in Sydney and Melbourne where vacancy rates are higher which could improve overall rental affordability, although the real impact will differ across geographies and household income distributions.
Already we are seeing this oversupply play out across the Sydney and Melbourne apartment markets, where rental listings have ballooned and rents have tanked.
You can see from the next SQM Research chart that detached house rental listings in Sydney are fairly tight (8,158), whereas there were a whopping 22,725 units available for rent as at 1 December:
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In Melbourne, there were 8,922 detached houses available for rents versus a whopping 23,406 units available:
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This gaping oversupply of apartments has driven rents sharply downwards in Melbourne and Sydney since the pandemic began in March and immigration flows stopped:
The rents situation is unlikely to turn around until immigration is rebooted.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
