This argument has some superficial appeal. Investors can be highly visible participants in the housing market, particularly at auctions, and they can influence prices at the margin in the short term. However, the claim that Australia “has enough homes” fundamentally misunderstands how housing markets operate.

The central issue in housing affordability is not who owns homes. It is whether the number of homes keeps pace with the number of households that need somewhere to live.

By that measure, Australia clearly faces a housing shortage.

Housing demand is driven by households, not population

One of the most common claims used to argue that Australia does not have a housing shortage is that the dwelling stock has grown faster than population. This comparison is misleading.

Housing demand is not determined by the number of people alone. It is determined by the number of households, which depends on both population and household size.

In simple terms: Households = Population ÷ Household size

Australia currently has around 27 million people living in approximately 11 million homes, implying an average household size of about 2.4 people per dwelling.

However, this does not necessarily reflect how Australians would prefer to live. Household sizes change over time and tend to decline as societies become wealthier. As incomes rise, people generally choose to live in smaller households. Young adults move out of their parents’ homes earlier, students and young workers prefer to have fewer housemates, couples delay having children, and older people increasingly live independently for longer.

This long-term trend toward smaller households is observed across almost every developed economy.

The pandemic provided a particularly clear example of how household size affects housing demand. During this period, Australia’s population growth slowed dramatically, yet housing demand surged and dwelling prices rose rapidly. One reason was that many people chose to live with fewer housemates or required more space at home, which effectively reduced average household size and increased the number of homes required to house even a stable population.

This illustrates an important point: housing demand can increase even when population growth stops.

Simply comparing dwelling numbers with population ignores a key driver of housing demand. Population growth is the primary driver of housing demand, but not the only driver. 

Australia’s housing shortage reflects insufficient supply

The practical consequence of these trends is that Australia has not built enough homes to accommodate the number of households that wish to form, even if we don’t know exactly how many households would form, if the opportunity arose (i.e. a home at an affordable price).

When housing supply does not keep pace with household formation, several things occur:

• housing affordability deteriorates
• rental vacancy rates fall
• rents increase
• more people are forced to live in larger households than they would prefer

These are precisely the conditions currently observed across Australia’s housing market.

The issue is therefore not the ownership of housing stock, but the insufficient number of dwellings relative to the number of households seeking accommodation.

Investors do not create additional housing demand

Another common misconception is that investors drive housing shortages by increasing demand for homes. The argument that each home purchased by an investor removes a home from an owner occupier is correct but, investors do not create additional housing demand because they do not live in their investment property.

Whether a dwelling is owned by an investor or by an owner-occupier, it still houses one household. 

If an investor sells a rental property to a first home buyer, the number of homes does not change. The renter who previously lived in that property must simply find another rental dwelling.

Even if the investor sold their property to their own tenant, the number of homes and the number of households in Australia remains unchanged. In other words, the ownership of the dwelling changes, but the housing shortage does not. 

This isn’t to say that investors don’t compete with owner occupiers. It is to say that investor activity is a symptom of the underlying shortage of housing stock – not the cause. An inadequate supply of housing sees prices rise, and first home buyers are increasingly forced from the market. Because investors are always the most solvent buyers in a market, they remain active. 

Forcing investors from the market doesn’t solve the supply and demand imbalance in the established market.  

Investors play a significant role in financing new housing supply. Last year, investors delivered almost half of all new homes without adding further to housing demand. Without this investment, the supply of new housing would be lower and demand would be unchanged, causing rental prices and investor activity in the established market to be even higher.

Another frequent error of analysis relates to the fact that 84 per cent of investors buy an established home. This is correct and is almost exactly the same ratio as owner occupiers and reflects that fact that the established market is significantly larger than the new home market. 

There is also a lack of logic that taxing investors that participate in the established market more will lead to an increase in investor participation in new housing supply. Taxing the sale of a used car does not lead to an increase in the sale of used cars. Investors are sufficiently astute to understand that a new home will become an established home and effectively incur additional taxes. 

The key is to reduce the cost – thereby boosting the supply – of new housing, lowering rental and home price growth, leading to an orderly exit of investors from the housing market as greater relative returns are available from other investment opportunities.

Vacancy rates confirm the existence of a shortage

One of the clearest indicators of a housing shortage is the rental vacancy rate.

When there are more homes available than households seeking accommodation, vacancy rates rise and rents fall. When housing supply is insufficient, vacancy rates fall and rents increase.

Across Australia, rental vacancy rates are currently around 1 percent, with some cities experiencing even lower rates.

These are historically low levels and reflect an extremely tight rental market.

A housing market cannot simultaneously have a large surplus of dwellings and vacancy rates near record lows. Low vacancy rates are a clear signal that the number of homes available is insufficient to meet demand.

The myth of “empty homes”

Another claim frequently used to argue that Australia has sufficient housing is that a large number of homes sit vacant.

This claim often arises from Census data showing that around 10 percent of dwellings are recorded as unoccupied on Census night.

However, “unoccupied” does not mean vacant.

There are many reasons why homes may be unoccupied at a single point in time, including:

• residents being away on holiday or visiting friends or family
• properties undergoing renovation or repair
• homes temporarily vacant between tenants or owners
• deceased estates awaiting sale
• holiday homes or farmhouses used only part of the year

These situations occur in housing markets around the world and explain why similar levels of “unoccupied” dwellings appear in census data across many countries.

Most of these dwellings are not available to house additional households and therefore do not represent spare capacity in the housing system.

Why policies should focus on supply

Housing affordability improves when the supply of homes increases relative to the number of households.

Policies that simply change who owns existing homes do not increase the number of dwellings available.

Policies that discourage investment in housing may even reduce new construction, further worsening supply shortages.

The most effective way to improve affordability is to ensure that housing supply can respond to demand. This requires addressing the barriers that restrict new housing construction, including planning delays, development costs, infrastructure charges and land availability.

Conclusion

Australia’s housing affordability challenges are the result of a persistent imbalance between the number of households and the number of homes available to house them.

Arguments that Australia “has enough homes” but that they are owned by the wrong people misinterpret how housing markets function.

Housing demand is driven by households, not simply by population. Investors do not remove homes from the housing system, nor do they add to demand. And extremely low vacancy rates clearly indicate that supply is insufficient.

Improving housing affordability ultimately requires a sustained increase in housing supply.

Australia needs to build more homes.

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