The reason behind Australia’s record tight rental market

One of the strangest phenomena arising from the pandemic is how Australia’s rental vacancy rate plunged to a record low at the same time as net overseas migration turned sharply negative.

According to the Australian Bureau of Statistics, Australia has lost around 180,000 migrants over the pandemic – a sharp turnaround from the circa 225,000 net overseas migrants that arrived annually over the prior 15 years:

Despite this sharp reversal in migrant flows, Australia’s rental vacancy rate has plunged to only 1.2% nationally, according to SQM Research, which is the lowest level in records dating back to 2005:

The loss of so many migrants should logically have driven Australia’s rental vacancy rate higher. However, vacancy rates instead plummeted.

The most plausible explanation for this outcome is that Australians’ desire for extra space amid work-from-home and lockdowns has seen the number of people per dwelling fall sharply. In turn, this has lifted rental demand despite sluggish population growth.

In a speech delivered on Wednesday, the Reserve Bank’s Assistant Governor (Economic), Luci Ellis, confirmed this hypothesis with actual data:

Spurred by the experience of lockdown and self-isolation, many people understandably wanted a bit more space, and perhaps a garden. Some also needed space where they could work, or perhaps just fewer flatmates to share that space with…

Average household size has fallen since the pandemic began (Graph 1). The share of group households declined in 2020 and has remained at this lower level. By contrast, while some young adults moved back in with their parents at the onset of the pandemic, that shift has since reversed.

The decline in average household size increased the demand for homes (by number). This helps explain why rental vacancy rates quickly returned to low levels even though the international border was closed and population growth declined to be close to zero. Roughly speaking, the decline in population growth meant that there were up to 200,000 households that didn’t arrive in Australia over the past two years, who would have done so if population growth had stayed where it was before the pandemic. But the decline in the average size of households that were already here broadly offset this.

With net overseas migration projected to turn positive, and revert back to mass pre-pandemic levels by 2024, Australia’s rental vacancy rate should tighten further (other things equal), dealing another blow to Australia’s long suffering renters.