Australia is currently grappling with a housing crisis in which property prices and asking rents have soared to unprecedented levels. What’s going on?

Well, at the heart of the issue lies a stark supply-demand imbalance.

The demand for housing is intensifying due to the country’s rapidly growing population and the post-pandemic return to city living. Meanwhile, housing supply has struggled to keep pace with demand. As a result, Housing Australia recently warned of a 106,000-home deficit by 2027.

To address this, the federal government has set a new target to build 1.2 million new homes over five years from July 2024.

But while real estate and housing industry bodies supported the move, there remains concern that action is not being taken fast enough.

Increased demand

There’s been a surge in population growth in Australia following the reopening of borders with 548,800 people immigrating during the year ending 30 September 2023, according to the Australian Bureau of Statistics. That’s up 60% when compared to the previous year.

All these people need to live somewhere, putting pressure on Australia’s rental markets.

Adding to demand pressures is the move away from work-from-home policies post-pandemic, which has seen an influx of people return to the cities, alongside the rebound in international students.

However, Australia has lost critical rental stock since the pandemic, with Property Investment Professionals of Australia data showing 16.7% of investors had sold at least one property in the previous two years.

Short-term rentals in popular tourist areas have also contributed to moving suitable accommodation off the long-term rental market and onto platforms like Airbnb and Stayz.

At the same time, higher interest rates and soaring property prices have combined to make it harder for many first home buyers to get on the ladder, keeping them in the rental market for longer.

As a result, the national vacancy rate has dropped to new lows with just seven out of every 1000 rental properties across Australia untenanted in February, a record-low, according to Domain.

Supply challenges

Compounding the problem is a significant slowdown in new building activity.

Take building approvals, for instance, with recent ABS data showing just shy of 163,000 dwellings were approved in the 12 months to January.

That’s significantly below the 240,000 new homes that would need to be constructed every year to meet the federal government’s target.

Then there are new home sales.

While Housing Industry Association (HIA) data shows these grew 5.3% month-on-month in February, this was from very low levels.

HIA senior economist Tom Devitt said higher interest rates have largely caused the slowdown in sales.

“The slowing in sales and building approvals will flow through to a decade low volume of new houses commencing construction in 2024. The economic impact of this slowdown will become increasingly evident in 2024, as employment in the home building industry falls,” he said.

“The higher borrowing costs are compounding the elevated cost of land and construction, drying up the pipeline of new home building work despite the significant pent-up demand for housing.”

Even the sale of residential land has fallen, down 28% across the country over the 2023 calendar year, according to the Urban Development Institute of Australia’s (UDIA) flagship State of the Land 2024 report.

To make matters worse, high construction and borrowing costs have made it more challenging for construction companies to meet their commitments with some firms collapsing as a result.

For existing properties, the lack of supply has had a significant impact on property values.

Despite increasing interest rates, property prices are continuing to climb, making the market more challenging for buyers.

It’s also exacerbated the rental market’s affordability crisis.

Solving the crisis

Improving housing supply and affordability will be the ultimate answer to the housing crisis, but how this is achieved is more complex. The Federal government’s October 2023-24 budget pledged to increase Commonwealth rent assistance for around 1.1 million households and invest more in social and affordable housing. It also announced a tax break from 30% to 15% for eligible investment trusts to ensure more development of rental properties.

The government has also established the Housing Australia Future Fund, investing $10 billion into the fund. This will help deliver 30,000 new social and affordable rental homes in the fund’s first five years.

First home owners can make use of the Home Guarantee Scheme (HGS), including the First Home Guarantee and the Regional First Home Guarantee, which help buyers purchase homes sooner.

The new budget has expanded the HGS, lessening eligibility requirements to open the scheme up for more people.

For those with the means, buying an investment property at the moment might be a good decision. With property values increasing and a demand for rental properties, an investment property can generate passive income while increasing in value.