The quickest way to fix the housing crisis

For most of the last decade, the national rental vacancy rate hovered around 2.5%. It collapsed to 1.0% within nine short months during the pandemic.

The ensuing housing crisis has been well documented. Weekly rents rose more than 50% nationally, while the number of people homeless grew twice as fast as new households.

Population growth did not cause this crisis

Just look at the data. Population growth was essentially zero when the housing market started imploding. By the time population growth began exceeding normal levels, the vacancy rate was already entrenched at 1.0%.

It’s also worth noting that, while population growth is currently very high, it is merely offsetting the very low rates of growth seen during lockdown. Total population growth over the period since the pandemic began is lower than the same period prior to the pandemic.

So if it wasn’t too many people, what caused this crisis?

Australian households simply got smaller during the pandemic. Lots of people living in share houses found their own place. Young adults moved out of the family home. Divorces and break-ups spiked, splitting households in two.

The RBA has been talking about this dynamic for some time. Last year, they produced a dataset showing the collapse in the average size of Australian households (see graph below). Last week, an Assistant Governor called it out as directly as any central banker can.

This splintering of households meant we needed to find roughly 160,000 new dwellings in just nine months. That was a big ask – too big, as it happens.

Of course, new households are always being created. The dynamic itself isn’t unusual. What was unusual was the speed and scale of the adjustment during the pandemic. The housing market just wasn’t flexible enough to absorb such a rapid increase in new household formation.

As a result, virtually all the vacant rental stock was snapped-up in very short order. The unlucky among us are now paying 60% more in rent, while the truly hapless are sleeping in cars, caravans and tents.

How to unbreak the housing market

Two options are usually offered as solutions to the housing crisis: build more houses or cut immigration. In truth, both paths would get us there.

The problem with relying on new dwelling supply is that it’s an incredibly slow burn. New dwellings cannot be conjured up (at sufficient scale) by policy targets and social housing investment. The vast majority of new housing in this country is delivered by the private market, and right now that market is hibernating.

As for immigration, have we already forgotten the effects of the pandemic border closures on the economy? The labour market is tight enough as it is. Unless we keep importing labour, the housing crisis will be dwarfed by a full-scale economic one.

Here’s a third path.

The housing crisis was created by households splintering. That means it can just as easily be resolved by households consolidating.

According to the RBA, if the average household size returned to levels seen in the past, we would need 1.2 million fewer dwellings. In other words, it would have the same effect on the housing market as achieving National Cabinet's hugely ambitious Housing Accord target.

That would certainly fix things.

Consider the example of a university student who had moved out of a share house into their own place during the pandemic. I saw a member of this cohort interviewed on a popular news program recently.

The program was airing the student’s grievance of being “forced” back into share housing by steep rent increases. The just response, we were told, is a rent freeze. Rents should be capped to keep the young person in the lifestyle to which they had become accustomed.

I would suggest that student run, not walk, back into a share house.

The quickest path to solving the housing crisis is to return the average household size to its pre-pandemic level. It would be far quicker, and require far less investment, than increasing dwelling supply. And it would have far fewer unintended consequences than cutting immigration.

In my view, we should be giving people every incentive to re-consolidate households. The last thing we should be doing is pushing in the other direction with rent freezes. That will only embed the status quo, which is all well-and-good if you’re benefiting from it; not so much if you're living in your car.

The Federal Government has just gifted every household $300 to take the edge off energy bills. How about a $1,000 bonus for people who move into a share house? I reckon that’d get the vacancy rate rising in no time.