The worst of Australia’s housing crisis is yet to come

Housing has been the hottest political and economic topic in this country for years now, but if you think we’ve seen peak fury, you are wrong. The stage is set for an eruption of economic emotion as the housing market goes further into meltdown mode.

Here’s the situation as we find it now: rental vacancies are at record lows, while rental inflation is ceaselessly rising, up 6% over the past year and not likely to cool any time soon.

Migration is also running hot, with a net 150,000 permanent and long-term arrivals in just the first three months of the year. (This is different from net overseas migration, which can involve granting a visa to someone already present in the country.)

While this is happening, the building sector is starting fewer new builds, with approvals at their lowest levels in about a decade — well below the recent peak and even below peak levels of approvals back in the 1980s.

We aren’t going to build our way out of this, by the looks of it.

Melbourne in particular is packing up and going home, as the next chart shows. Crane numbers are falling, and what’s looming on the horizon is usually involved in a Dan Andrews infrastructure project, be it rail, road or new hospitals.

The net result is house prices are rising despite the firmest prognostications that they would fall in 2023. The price of dwellings rose 1.2% in May alone, according to CoreLogic. If that rate were sustained for a year, the median dwelling in Australia would go up 14% in a year and add $100,000 to its price tag.

In past housing booms, it was credit supply that made housing go crazy. Now it’s the underlying level of demand. Interest rates are supposed to be restraining demand for mortgages, but when people are clambering all over each other to find a place to live, they can only do so much.

In this environment, there’s only one way the housing market can adapt, and that is by absorbing more people into each dwelling, on average. RBA boss Philip Lowe told Senate estimates as much — and got roundly shellacked for being out of touch. But he doesn’t control the migration numbers, nor the planning system, nor does he build public housing. He’s just calling it as he sees it. People per dwelling is not a fixed quantity — it fell in the pandemic and it will now surely rise.

There’s another way the market adjusts, too, and that’s by spitting people into homelessness. Expect to see more people rough sleeping — and remember rough sleeping is only the visible part of the homelessness iceberg. Some 10% of homeless people sleep on the street, while 90% are couch-surfing, camping in backyards, staying in shelters, boarding houses, etc. This doesn’t include people living in severely crowded dwellings, who may also be categorised as homeless by some definitions.

The Albanese government’s limp “Housing Accord” isn’t going to satisfy hordes of angry voters at the next election. There needs to be more, and I would not be surprised to see action on the migration side, more first-home-buyer handouts, and even some social housing construction as the government begins to appreciate the depth of feeling on the topic.