Building more homes won’t guarantee cheaper rents, report finds

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Key points

• COVID lockdowns presented Melbourne with a “remarkable experiment” on the consequences of flooding the market with extra homes, a think tank has found.
• The city lost 1.6 per cent of its population, or 80,000 people, in the year to mid-2021, while housing construction continued unabated.
• Although there was up to 130,000 extra homes in the market, Prosper Australia found there was little downward pressure on rents.
• Its casts doubt on the theory that fast-tracking new housing will bring rents down.

Fast-tracking the construction of new homes may not make rentals more affordable in Melbourne, according to a new analysis based on the city’s “unnatural” housing experiment during the COVID-19 peak.

In 2020-21, Melbourne experienced a rare population decline as the city endured one of the world’s longest lockdowns, leading to international students flying home and some residents leaving for regional areas.

More supply doesn’t necessarily mean cheaper homes, according to Prosper Australia.Credit: Teagan Glenane

But the construction of new homes remained strong during that period, independent think tank Prosper Australia said.

Its economic analysis found that rental prices should have dropped by much more and stayed lower for longer, during the pandemic. However, the reduced demand and increased supply did very little to meaningfully lower prices because the extra housing was absorbed by remaining residents who wanted more space.

Prosper found excess supply, equivalent to two or three years of additional construction, only lowered housing costs by one-tenth for about a year.

Its report urges caution against the assumption that increasing housing supply is guaranteed to drive down rental prices, finding income supplements did far more to help affordability than supply.

Prosper estimates that over the two years to mid-2021, construction outpacing of population growth generated an excess supply of dwellings of about 5.1 per cent to 6.7 per cent of housing stock – the equivalent of 100,0000 to 130,000 dwellings more than previously needed to house the population.

But Tim Helm, Prosper Australia’s director of research and author of the study, said the effect on rents was far more muted than should have been expected for such a large increase in supply.

He said this was because at the same time, work-from-home mandates convinced existing residents to upsize their accommodation.

“Rents dipped only for about a year and then within a year have recovered back to pre-pandemic levels,” Helm said.

“An enormous excess supply of housing was eaten up by those with means to do so, offering little relief for those in housing stress.”

The report says the post-lockdown migration rebound wasn’t the only reason rents have since started rising again.

“Melbourne’s rents rose quickly from mid-2021 to mid-2022 despite no reversal of the population/construction shock,” it says.

“By mid-2022, Melbourne’s population was still 0.5 per cent below March 2020 levels, and the dwelling stock 4.8 per cent larger, but average rents were no lower than in March 2020.”

Prosper is a think tank funded by a trust formed in 1928 to make the argument that the burden of taxation should move away from income and businesses and onto land and other finite resources.

As revealed in The Age, the state government is looking at taking statutory planning powers away from local government as part of a planning push to boost urban density and ultimately squeeze an extra 1 million homes into Melbourne suburbs by 2050.

Premier Daniel Andrews has confirmed a package of planning reforms is due to be delivered in the second half of this year, aimed at getting more houses built.

The federal and state governments have singled out councils as key culprits for the housing crisis, suggesting they have been responsible for blocking developments on behalf of NIMBY – not in my backyard – ratepayers.

Helm said the findings from his report poured cold water on that narrative.

“There’s just no question that having the right policy setting so that developers can supply housing when people want it is critical,” he said.

“But we think this agenda, particularly the deregulation, planning, taking away planning powers from local councils, has just been overblown in its significance.”

The Property Council of Victoria, which has lobbied the government for the right to bypass councils for planning permissions, declined to comment on the report.

Max Shifman, president of developers peak body the Urban Development Institute of Australia, said the report contained “a lot of conflated issues” and it wasn’t entirely correct to say there was a major oversupply.

“There were so many unusual things that happened concurrently during the pandemic period,” he said.

“They’ve pulled a lot of interesting data together, but I don’t think they’ve assessed it and come to the right conclusion from that data.

“The simple fact is, we have consistently under-delivered the number of dwellings we need, and it’s only getting worse.

“Even approved stuff is not getting built anymore. And it is absolutely the number-one thing we need to fix. We need to get more capacity in the system where its needed and the actual type of housing that people want.”

Melbourne University Professor of Urban Planning David Nichols – who was not involved in the report – said it made logical points about the “accidental laboratory” that was created during the pandemic and that lessons that could be drawn from that.

“If the market behaved the way that people with vested interests claim that it does, then we would have seen a longer reduction in rents for longer, and perhaps some greater availability of choice”.

Despite this, Nichols said he wasn’t opposed to stronger state-based planning mechanisms to increase housing options.

“For example, the state government wants to bring back the SEC [State Electricity Commission], they should also bring back the Melbourne and Metropolitan Board of Works as a planning authority,” he said. “But not do it for the sake of vested interests.”

A Victorian government spokesman said housing affordability was impacted by a number of factors, including tax settings, migration and land supply as “evidenced in the State of the Nation Housing 2022-23 report”.

He said a review of the government’s Plan Melbourne program was underway and pointed to the government’s “significant incentives for developers to enter the Build-to-Rent market” as evidence of how the market could provide affordable rentals at a secure price.

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