What Australia’s booming population means for housing
Accelerating population growth has revealed a startling shortfall between the number of people expected to call Australia home, and the number of homes for those people to live in.
ABS data revealed the highest national quarterly population increase on record in the March quarter, and the gains from migration have never been higher.
But with the pace of building behind where it needs to be to house the booming population, more needs to be done to avoid worsening an already dire housing crisis.
There are many indications that strong population growth has accelerated to reach new historic records.
Comparing migration gains to the average in the decade to March 2020 shows an additional uplift of about 190,000 in 2022, and possible lift of about 300,000 in 2023, given net long-term and permanent arrivals — a timelier proxy for the official data — indicate continued strong gains in the June quarter and beyond.
This means net migration will have fully caught up the pandemic losses of about 440,000 people before the end of this year.
Capital city estimated residential population (ERP) updates are less timely than the national and state updates, but using historic average shares to estimate potential population gains at the capital city level indicates potentially a very fast pace of growth in some cities.
While not a perfect measure (given factors such as Covid have affected the number of Australians moving interstate) we can roughly estimate that the populations of Sydney, Melbourne, Perth and Brisbane are likely to have grown significantly in the year to June 2023.
This has likely contributed to the fast turnaround in home prices in 2023, alongside tight rental markets.
The reversal in price growth has been most significant in cities where population growth has picked up the most and rental markets have tightened most.
However, though a contributor, the causality between population growth and home price growth isn’t that simple in reality, and other factors like supply conditions matter greatly.
So how much has resurgent population growth added to housing demand?
Smaller household sizes during the pandemic resulted in significant additional demand for housing and roughly offset the entire lost population increase across both 2020 and 2021 combined.
Although recent data suggests that average household sizes (AHS) have begun to increase in the capital cities in recent months, the AHS remains below pre-pandemic levels and was at a historically low 2.49 people per household in January 2023.
Net migration has fully caught up the pandemic losses and then some, meaning demand for housing is much stronger.
While growth is expected to ease in 2024 and 2025, faster than expected population growth has meant more people are calling Australia home — against the backdrop of pre-existing housing supply issues — giving rise to a mismatch between housing supply and demand.
The fact that more than 80% of population growth is currently stemming from net migration means there are more working-age adults than if growth stemmed from natural increase. This means that growth in the adult population is steadily higher than total population growth, further boosting demand for housing.
Using the official population change in the year to March 2023, a potential 226,000 additional households would have needed homes. Australia completed around 170,000 new homes over the year to March 2023, meaning a shortfall of around 56,000 homes based on population growth alone.
This is a problem, with supply already limited and smaller households having already compensated for the missing population gains in 2020 and 2021. The strong rebound in migration and “excess” population growth means there is a clear requirement to address our housing shortage.
Growth estimates for the six months following March 2023 indicate that unless the pace of building activity steps up, there would be a further shortfall of 41,000 homes.
Obviously, not all of our growing population would be housed in new homes. The rental market and existing dwellings are also housing options, and recent arrivals to Australia being most likely to rent.
But this does illustrate that with the current housing shortage and immediate supply issues, as well as challenged rental market conditions and the worst affordability in at least three decades, these issues aren’t likely to be improving.
Population growth is likely to place continued upward pressure on home and rental prices while supply conditions remain constrained.
Governments have begun to recognise the need for more housing, and in August, the National Cabinet agreed to build 1.2 million homes over the next five years.
But we're not building enough to hit that goal. To meet the 1.2 million goal, we need to increase our pace of building by almost 40% from where it currently stands.
Concerningly, with estimated annual population growth of close to 600,000 people per year from both natural increase and net overseas migration, the new residents will simply absorb the 1.2 million homes based on current household sizes.
Mitigating factors are the potential for household sizes to increase, population gains to slow more markedly into 2024 and beyond, and building activity recovering.
As the population continues to grow, more action on housing supply will be required as well as infrastructure and investment frameworks to maintain the liveability of our future cities.
A combination of policies could help ease constraints, such as fast-tracking new supply of more of the right type of homes built where people want to live, building more medium-and high-density housing, reducing the planning impediments that hinder new supply and encouraging better use of existing homes.
** Credit to Eleanor Creagh, Senior Economist at PropTrack
