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More homes needed

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Demand for housing is currently strong despite slower population growth. But what will happen during the next two years? Our two-part feature helps members be prepared for the rocky years ahead.

Tim Reardon

HIA Chief Economist
How is it that demand for housing in Australia has boomed, at the same time that population growth has stalled? Australia’s population growth is around the lowest it has been in over 100 years, with growth of just 0.18 per cent during the 2020-21 financial year.

A reversal of migration is driving this. Normally, the number of people who arrive in Australia and take up residence exceeds the number of people who leave by around 200,000 to 300,000 per year. But over the 2020-21 financial year, the number of people who left exceeded the number of people who arrived by nearly 90,000 people.

Young people dominate migration, both inward and outward. The net outflow of people to other countries meant that the Australian population of people aged 15-64 years fell by around 83,500 during the 2020-21 financial year. 

This loss of people in prime working ages adds to the difficulties businesses are experiencing finding skilled workers. The loss of young people also accelerates population ageing, adding pressure to government budgets over the long term.
In contrast, before COVID-19, the number of people aged 15 to 64 years of age was growing by at least 200,000 people per year. 

Commonwealth Treasury expects future population growth and economic growth to be lower than what Australians are accustomed to. The 2021 Intergenerational Report sets this out. A loss of younger people today means fewer new families and births in the future. The Federal Budget is not expected to return to surplus in any year between now and 2060-61. 

More migration required

This Intergenerational Report analysis – budget deficits for 40 years – assumes that Australia receives a constant 235,000 net international migrants per year from 2024-25 onwards. This assumption aligns with the average net intake of the years 2015-16 to 2018-19. It implies that net immigration falls from 0.9 per cent of the population to a relatively small 0.6 per cent of the population Australia. 
This must identify strategies for improving growth and restoring the budget. For this reason, it’s likely that future governments will accommodate a higher level of skilled migration as part of their strategy to deal with these issues.

Something so strong

Despite these issues, builders are busier than ever before, as demand is strong. Population growth is a key driver of housing demand: more people means more houses are required.

Yet despite the current slow-down in population growth, demand for housing remains very strong. Lower interest rates and government stimulus (Homebuilder and state programs) have certainly helped. But there’s more going on in the market.

Demand for space at home has increased during COVID-19. This is the result of people spending more time at home. We see this in three trends.

1. Choosing houses

There has been a clear preference shift towards houses under COVID-19. The additional private space afforded by houses is more valuable. The longer commute is less costly. The price of houses has grown more quickly than the price of townhouses and apartments – the extent of this divergence has been unusual.

2. Fewer people per household

In townhouses and apartments, it appears there has been a shift towards fewer people per household. If a house and a backyard is not an option, living with fewer people is the obvious way of getting more space at home! The shift down in household size means demand for housing remains strong, even if population growth is weak. 

This shift down in household size is driven by an increase in activity among first homebuyers and changing preferences among renters. 

Dwelling purchases by first home buyers (measured with the number of loan approvals) increased by 54 per cent in 2020-21. Many first home buyers leave a share house or their family home to form a new household when they buy. This dynamic creates a larger number of households with fewer people in each one. In other words: a fall in household size. 

3. Renters keep it compact

Renters are choosing to live in smaller households under COVID-19. This makes sense: when everybody is required to work at home, housemates become even more annoying! 

In New South Wales, the number of rental bonds lodged with the government grew by around 32,500 over the first year of the pandemic. This increase (around 30,000) is a similar growth to previous years. It implies the formation of new households who rent is similar to previous years. This continued formation of new households has occurred despite a sharp slowdown in population growth in NSW, especially among younger working adults. 

The most likely source of new renter households is larger households devolving into smaller households. This includes the creation of lone person households by people who previously rented with housemates. 

It’s also possible that COVID-19 has seen an increase in people leaving their Australian family household or another household that’s owner-occupied to form a new renter household. This also explains why household formation among renters has held up, despite a decrease in population.

Future trends 

These trends will continue to drive demand for housing through 2022 and at least until migration returns. This will see strong levels of demand for new detached housing for a number of years.