Australia’s sick housing markets: Why we need a vacancy rate target of 4-5%

The latest “instant noodle” solution to Australia’s housing affordability crisis is “Build to rent”.

Rather than have “normal” people be able to buy a block of land in one of the largest and emptiest nations in the world and build their dream home, the new plan is to have mega corporations build cramped and congested skyboxes and rent them out.

A life time of renting for most Australians simply because our policy makers and politicians prefer that approach to actually trying to fix our demented and throughly broken banking and monetary system.

Whatever will they think of next? 

Oh well at least someone will be building something.  If that is the best we can do, let’s encourage those mega corporations to knock their socks off and build build build.

Low residential vacancy rates illustrate the problem 

One easy to understand and measure statistic demonstrates the housing problem in Australia – low residential vacancy rates.  A low rate means that there are fewer vacant houses at any point in time available for rent and more competition to rent them.

Available for rent is the critical point.   A house that is vacant but is not made available for rent is of no help to someone looking to buy or rent shelter.  Sure policies to force people to make housing available to rent would help but until that actually happens it is just a nice idea. People can spend years years waiting for nice ideas to happen.

When residential vacancy rates are too low for an extended period of time the wheels start falling off and housing affordability falls and housing stress rises.

It is no surprise that residential vacancy rates in our two biggest housing bubble cities – Sydney and Melbourne – have been stuck around 2% for decades. What is a surprise is how tight they are across Australia with a few exceptions.  See the table below Adelaide, Canberra and Hobart are all suffering vacancy rates of less than 2%.

Working out why the residential vacancy rates are too low in a particular city is an interesting exercise and provides ample fuel for idle armchair debates:

Is it?

* too few houses and apartments being built

* too many grannies hoarding bedrooms in large old family homes

* too many immigrants too quickly

* too few approvals of low cost land for new housing development

* too much housing left vacant by off shore buyers

* too much Air BnB

* too many students

* too much bank credit for speculators

* too many people choosing to own more than one house

* too many holiday homes

Working out which one is the “King of Causes” is great but the bottom line is that until a vacancy rates start with a 4 or a 5 at best you will have rents or prices rising slowly or stuck on a permanent plateau. At worst one or both will be rising too quickly.

Sufficient choice and options are the key

One look at Perth or any other city that achieves a healthy vacancy rate of at least 3% makes it clear that if we want to maintain a healthy amount of competition and downward pressure on prices and rents a bit of slack or a supply buffer in the housing market is the simplest and easiest way to do it.

The reasons a healthy (at least 3%) vacancy rate works are straightforward:

  • Renters have some choice of what to rent
  • Landlords have to try harder to win a tenant either with lower rent or a better maintained property
  • Badly maintained or over priced properties take longer to rent
  • It is harder for landlords to increase rents
  • The lower general level or rents and the lower certainty of finding tenants means the price a landlord is willing to pay for a potential rental property is lower
  • The lower prices bid by landlords reduces upward price pressure generally

If the vacancy rate tightens and falls below 3% more housing should be built and it really doesn’t matter who does the building or why as the expansion in supply from all sources will eventually affect the entire market.

  • Private corporations,
  • Public housing bodies,
  • NGOs
  • private individuals.

If necessary faster approvals and tax and other policies that favour NEW construction may be required.

The goal of those policies must be to generate a vacancy rate of at least 3% – possibly higher if the vacancy rates have been allowed to fall to 2% or lower for an extended period.

But surely a vacancy rate above 3% will end life as we know it?

A few years ago the crashniks said that if a vacancy rate hit 3% a property crash was just around the corner.  Perth with its vacancy rate of 4-5% over an extended period has proved them wrong. Perth shows that a vacancy rate of 4-5% is what you need to bring a frothy property market slowly to its senses. Rents and prices in Perth have been slowly falling for years.  Ultimately low cost housing and land may be Perth’s competitive advantage.

Despite that, the crashniks are still proclaiming a crash – any time now,  it’s only days, weeks, months, years, decades away – in Sydney and Melbournes even though vacancy rates struggle to hit 2% and have been stuck at those levels for years and years.

How to fix residential vacancy rates quickly

Without doubt the fastest way to quickly achieve a healthy vacancy rate in Sydney and Melbourne is to cut short term growth in demand from excessively high rates of immigration while continuing to build new housing like the clappers.  Considering Sydney and Melbourne are already home to hundreds and hundreds of construction cranes and worsening congestion, slowing the rate of immigration is likely to be the most practical short term lever.

When the vacancy rates hits 4-5% and sanity has been restored to the market, we can either slow the rate of housing construction or accept more immigrants.

Air BnB and similar services are here to stay

A good example of how twisted the debate has become is that when we get an innovation like Air BnB boosting demand for certain types of housing we have people calling to “ban it” – even though it is clearly very popular and servicing a demand – instead of doing the most obvious thing which is to immediately slow demand from immigration and immediately approve a lot of new construction to deliver the extra housing that Air BnB has generated a demand for.

Bottom line

A residential vacancy rate of 3-4 % is a sign of market health and should be a fundamental target of housing policy and a measure of policy success or failure.  A vacancy rate of 4-5% may be required to restore health to markets damaged by excessively low rates over an extended period.

Categories: Macrobusiness

1 reply »

  1. Perth is perhaps the shape of things to come – there’s somewhere around 15,000+ empty rental properties and its been putting a lot of downward pressure on rents since late 2014. Just don’t move there looking for a job – I have friends there and they assure me that the job market is almost non-existent and there are still droves of people headed east.


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