Prosper’s latest report sounds a cautionary note for policymakers placing market supply at the centre of affordable housing policy.
Report author, Dr Tim Helm, Prosper’s Director of Research and Policy, described the report, entitled “Melbourne’s pandemic rental dynamics: an (un)natural experiment in excess supply,” as an exploration in data of housing market imbalances through the pandemic.
“As the rental crisis bites, there are calls from all quarters to boost private sector housing supply through ‘fast track’ planning, upzoning, tax breaks and subsidies,“ stated Dr Helm,
“Melbourne’s pandemic experience presents an ideal natural experiment for what might happen if we ‘flooded the market’ with additional housing” says Dr Helm.
“Prior to the pandemic Melbourne was one of the fastest growing cities in the developed world – welcoming, on average, 100,000 additional residents, the population of Bendigo, every year since the early 2000’s”
“Despite the breakneck pace of growth, construction kept up. In the three years before the pandemic Melbourne added one new house for every 2 new residents, and we built more than enough over the last decade to maintain the average household size at 2.6 persons per dwelling.”
“Over the course of 2020 and 2021 the city experienced a major population shock – recording its first year of negative population growth since the Great Depression.”
“Meanwhile, the rate of construction continued more or less unchanged. Combined with the population outflow, that was as if Melbourne had doubled its rate of dwelling construction, generating an excess supply of 100,000 dwellings, or enough to house 260,000 people.”
“By mid-2022, Melbourne’s population was still lower than before the pandemic, and we had built more houses, but average rents were no lower than in March 2020.
“The effect of this ‘virtual building boom’ was to knock down average rents by a maximum of 12% for about a year. Low rents did not last. Within a year, rents were back to their pre-pandemic levels despite there being fewer people and more houses.”
“There are several reasons for this, including the demand effect of more people working from home, but we believe that fast adaptive responses to falling rents were a big part of the equation.
“When housing space became cheaper, households unsurprisingly consumed more of it, and household sizes fell. People traded up, moved out, and share houses broke up.”
“Additionally, some 35,000 more dwellings than usual were left vacant or under-used, well into 2022.”
“If an excess supply shock on this scale can do so little for prices, even accounting for changing preferences, how can we hope to deal with the pointy end of housing stress through additional market supply? Focusing on supply seems like a ‘trickle down’ approach to helping those in need.”
“Housing affordability is not just about housing costs, but income too. The Coronavirus Supplement did four times more for the budget of each recipient over its 11 months of operation than flooding the market with supply did for the average rental household in Melbourne. The income side of the affordability equation is where our attention should be,” finished Dr Helm.
- The report estimates that slow population growth in 2020 and a population outflow of around 80,000 residents or 1.6% of the population in the year to mid-2021 amid ongoing, stable construction over these years produced an excess supply of 100,000 to 130,000 dwellings more than was required to house the population at pre-pandemic rates of occupancy.
- The impacts of this excess supply on housing costs was small and short-lived. Average rents fell by only 12%, and for only about a year. The report estimates that the average rental household will have saved around $2,200 for a maximum of one year as a result of the decline in rents to mid-2021.
- 35,000 more dwellings than usual were left vacant or under-used over the entirety of 2021 and 2022, a 51% increase on 2019 levels. Withheld supply absorbed one-third of the excess supply shock.
- The decline in average household size in Melbourne from more than 2.6 people per household in 2020 to around 2.5 by end-2022 meant the population remaining in the city occupied around 4% or approximately 80,000 dwellings more than previously required, absorbing the other two-thirds of the excess supply shock.