Student Accommodation and the Australian Rental Market

  What is the effect of the number of overseas students?

 

There were over 1.6 million students enrolled in Australian universities in 2023, of which a quarter were international and three quarters domestic students. Although the majority local students live in their family home and some international students are with families under homestay arrangements, there are many others who rent a room in a share house or live in student accommodation, which can be either on or off-campus. There have been competing claims about the effect of international students on the rental market, with some arguing it is not significant while others maintain they are crowding out other renters and driving rents up. 

 

There is limited data on the effect of the number of university students on rental markets in Australia. How significant are international students in the demand for rental property? This post looks at the available data from different sources in an attempt to answer that question. It discusses the exclusion of student accommodation from ABS housing statistics and the number of dwellings, and the factors that have been affecting the market for rental accommodation over the last few years.

 

Students, Migration and Rents

 

The Australian Bureau of Statistics tracks Overseas Arrivals and Departures by visa group which includes temporary student visas. This is high level data, and as shown in Figure 1 the numbers have grown significantly over the last few years. In the two years 2022 and 2023, 945,000 overseas students arrived in Australia, followed by 708,110 in 2024. According to the Department of Education 2023, about half of these international students are at a university and half are in the VET system. 

 

One of the obvious problems associated with the number of international students is the Commonwealth Government’s lack of control over their number, because it is the universities that process and accept applications and therefore determine how many will commence each year. As Commonwealth funding for domestic students and research has declined, Australian universities have come to rely on the income from international students.

 

Figure 1. Overseas student arrivals and departures

 

Source: ABS 3401

 

Of the over 739,000 overseas students who arrived between 2021 and 2023, there were 409,248 of them enrolled at university in 2023. According to the Department of Education in 2023 for Australian universities:

·      Total student enrolment was 1,600,563;

·      Domestic enrolments were 1,076,027 (86,000 less than 2021 and the lowest level since 2017);

·      Overseas students were 409,249.

 

Figure 2. University student numbers 2014-2023

 

Source: Department of Education 2023

 

 

Rents in Australia began rising in 2022, as shown in Figure 2, and the core issue is the effect of these international students on the rental market in Australia. That, however, is not obvious and there is a lot of noise in the data. Firstly, it is the difference between arrivals and departures that affect demand for housing, and that is nowhere near the size of the total for arrivals. Since 2019 the net difference has been just under 110,000 students, although the difference for the 2022 and 2023 years when rents were increasing rapidly was 168,200. Correlation, however, is not causation.

 

Second, inflation peaked at over 7% in December 2022. As Figure 3 shows, the rise in rents started after CPI began to increase. Then, due to the effect of lease terms, rents took a year longer to adjust before the rent index levelled out. Overall, since 2020 the total increase in the rent index was similar to the increase in the CPI. 

 

Figure 3. Australia Consumer Price Index

 

Source: ABS 6401

 

Third, two other factors affected the rental market. These were a decrease in household size and a decline in residential building. A 2023 RBA Bulletin article found the ‘decline in average household size since the start of 2020 – around 1 per cent – is estimated to have contributed to around 120,000 additional households being formed and, as a result, additional demand in the rental market.’ As a result, since 2020 vacancy rates have been low and the article also found ‘Growth in the stock of total dwellings has slowed in recent years, reflecting a slowdown in apartment construction after strong growth in the mid-2010s. This is important for rental supply, as about half of the total stock of apartments are rented out.’

 

Figure 4. Vacancy rates

 

 

Source: Proptrack

 

Finally, there has been a rapid increase in the total resident population from immigrants. There was a net gain of 2,948,500 permanent migrants between January 2022 and December 2024, almost 2.8 million people greater than the 177,240 net number of temporary students over that period. Because of their number, these permanent visa holders will have had a much larger effect on the rental market than students because they typically rent before purchasing a home. 

 

Figure 5. Population and dwelling totals

 

Source: ABS 3101 and 6432. 

 

ABS Housing Statistics

 

One of the anomalies in Australian housing statistics is that student accommodation is not included. The ABS classifies student accommodation as non-residential building, and a recent ABS release on student accommodation approvals has highlighted the problem. In March the ABS released an estimate of student accommodation approvals in Australia between 2021-22 and 2023-24, when a total of 9,759 student accommodation rooms were approved for construction. Approvals were 1,684 rooms in 2021-22, then 2,897 in 2022-23, and 5,178 in 2023-24. This was the first time the ABS has collected this data. 

 

This was the first time these estimates have been published, and the ABS explained ‘Purpose-Built Student Accommodation (PBSA) is student accommodation built for the purpose of providing sleeping quarters for students. These types of buildings are captured within the ABS’ Building Approvals publication as non-residential building jobs because they are not classified as a residential building job using the Functional Classification of Buildings (FCB).’ In the FCB, student accommodation is in two non-residential classifications:

·      FCB 411 Education buildings: This is typically used when the student accommodation is owned by the university.

·      FCB 462 Hotels, motels, boarding houses or lodges: This is typically used for student accommodation owned and managed independent of the university (such as a residential college).

 

The ABS notes ‘there is no associated count of dwellings for PBSA captured within the Building Approvals publication. Likewise, PBSA does not have a unique and distinct category for which building value estimates are published; instead, the value of a PBSA job contributes to the higher level aggregate non-residential series along with other non-residential building jobs. This makes understanding the size or potential growth of PBSA not readily available from the Building Approvals publication.’

 

There are over 11 million dwellings in Australia, so the PBSA percentage could be around one percent of the total, depending on the actual number of rooms. However, if only a third of dwellings are available for rent, then the PBSE share would be more significant at three percent.

 

Purpose Built Student Accommodation

 

There are several reports on the student accommodation market from real estate agencies. Their numbers differ on both the total and distribution of beds {note the ABS had approvals for rooms). There are up to 130,000 beds in PBSA, but how many are filled by international students is unknown. 

 

A CBRE report in July 2024 estimated a total of about 102,000 beds and 41,000 rooms in PBSA , and claimed ‘ student accommodation in Australia is ~6% or one bed per 15 higher education students.’ They had the figure for beds below. 

 

Figure 6. Location of PSBA beds

 

 

 

 

A report in November 2024 from the Property Council and Urbis found ‘there are currently 132,700 student accommodation beds in Australia, over half (53 per cent) of which are owned or managed by the private PBSA sector. This is a 90 per cent growth on the number of beds a decade ago.’ Across the states Victoria had 43,982 beds, New South Wales 34,069 beds, Queensland 23,353, the ACT 10,226 and South Australia 9,133. There were 29,500 beds in the supply pipeline, with around 7,400 beds in the construction stage, with 14,900 beds approved for development and nearly 7,200 beds waiting development approval.

 

Another report from Savills in June 2024 divided the ‘operational beds’ into those run by managers (61,785) and those run by operators (80,553). The total was 142,338 with 32,482 in the pipeline to 2027. However, Scape was included in both groups, so the numbers should be adjusted for the double counting of their 18,900 beds and 3,600 in the pipeline. That gives 123,438 current and 28,882 in the pipeline, with 43% of operational beds managed. No definition of ‘managers’ and ‘operators’ was given. Savills’ estimates are higher than CBRE’s but comparable to those from Urbis and the Property Council. 

 

University Owned Accommodation

 

The number of rooms and beds managed by universities is a data black spot. These are university residences (self-catered rooms) and residential colleges (rooms with meals and laundry provided). There are over 60 residential University Colleges and Halls that are members of University Colleges Australia (UCA). 

 

Large city universities like Sydney and Melbourne might have between five and ten residences. ANU has 18, and Charles Stuart University has 23 residences across six campuses. There are 16 universities with 40,000 or more students enrolled, and 17 with 20,000 to 40,000 enrolled. A conservative estimate of the total number of beds would be 50,000, but there probably is more. 

 

Longitudinal Surveys of Australian Youth

 

Most international students are in the same age group as domestic students, and many students from both groups will therefore be looking for rental accommodation. There is some data on domestic students in the Longitudinal Surveys of Australian Youth (LSAY), which track young people as they move from school into study and work. Participants enter the study at 15 years old and are contacted once a year until they are 25. Survey participants are a 'cohort', the first was 1995 followed by 1998, 2003, 2006 and 2009. The current cohort ran from 2015 with 14,530 participants to 2025 with 2,996 participants, when they were 23 years old. The education and living arrangements data below is weighted based on the survey sample.

 

The peak years for university for this cohort were in 2019 at 43% and in 2020 with 46%. In the years on either side of 2018 and 2021 the proportion and number of the cohort studying a bachelors degree was 35%. The survey does not have more specific data on students who are renting, however the proportion and number of the cohort renting in 2018 was 7.2%, in 2019 was 12%, in 2020 was 16%, and in 2021 was 25% The data for renting in 2022 was 29.8% and 2023 was 31.4%, and in those years was close to the percentage in de facto relationships. 

 

The survey data indicates the great majority of domestic university students live with their family while studying, which suggests many of those renting will be studying at a university not in their home city. Some unknown proportion of them will be in a university college. An estimate based on the LSAY percentages would be 35 to 40,0000 domestic students renting accommodation each year, but that may not be very accurate because the number of survey respondents drops away after school and the sample becomes smaller and less representative. 

 

Other Research

 

A survey by Mandala for the Student Accommodation Council in 2024 found international students make up 7% of the rental market in Victoria, 6% in NSW and WA, and 5% or less in the other states. The report also found a quarter of international students live outside the rental market and 14% are in private student-only accommodation. The report argued against capping international student numbers because that would ‘only reduce this by 0.6% and have little impact on rental availability.’ The Student Accommodation Council is part of the Property Council and represents the private providers of PBSA, so the survey has to be seen in that context.

 

A 2025 journal paper by Michael Mu and Hannah Soong on international students and the rental market investigated ‘the statistical relationship between international student numbers and rental costs for local residents, while accounting for vacancy rate and rental inflation.’ The paper concluded ‘international students were not the culprits of the rental crisis in Australia … the effect of purpose-built student accommodation on the housing market remains unknown until pertinent data are made available for further research. Government discourses also scapegoat international students for the rental crisis, throwing them under a bus for political reasons.’  This research uses statistics and models so the result is not conclusive, because models reflect assumptions and parameters. However, this research found a weak relationship between international student numbers and rents. 

 

Conclusion

 

Both rents and international student numbers began rising in 2022, however the effect of those students on the Australian rental market is not obvious. Claims that international students are crowding out other renters use the total number of overseas students, whose numbers have grown significantly over the last few years. In 2022 and 2023 a total of 945,000 overseas students arrived in Australia, followed by another 708,110 in 2024. About half of international students are at university and half in the VET system. However, combining student accommodation, homestays and living with friends and family, between a third and a half of international students will probably not be in the wider rental market. This is the first bit of unknown data.

 

The ABS classification of residential buildings excludes short-term commercial accommodation, communal accommodation, and housing for students. Student accommodation is classified as a Non-Private Dwelling and defined as non-residential because it is not long-term accommodation. Educational buildings include student accommodation co-located on the grounds of the establishment. Not including student accommodation in housing statistics is the second bit of unknown data. In March the ABS released an estimate of approvals for 2021-22 and 2023-24, when a total of 9,759 student accommodation rooms were approved for construction,the first time the ABS has collected this data. There are reports on the student accommodation market from real estate agencies, but their numbers differ on both the total and distribution of beds.

 

The most recent data for 2023 had over 1.6 million students enrolled in Australian universities, of which 409,249 were international and three quarters domestic students. The great majority of local students live in the family home, some international students have homestay arrangements, while others rent a room in a share house or live in student accommodation, which can be either on or off-campus. There are perhaps 130,000 beds in purpose built student accommodation with around half in university residences, but how many are filled by domestic students and how many by international students is the third bit of unknown data. 

 

What crowding out claims overlook is that the difference between student arrivals and departures affects demand for rental accommodation from year to year. For the 2022 and 2023 years, when rents were increasing rapidly, the difference was 168,200. The majority of international students are in Melbourne and Sydney, so they will have local effects on the rental market in suburbs around universities in those cities, which will have affected domestic students looking for rental accommodation.  

 

However, there were other factors affecting the rental market at the time, such as a decrease in household size and the decline in residential building. The decrease in average household size since 2020 added around 120,000 households to demand in the rental market. Falling apartment construction affected supply, as about half of the total stock of apartments are rented. 

 

Also, there was a net gain of 2,948,500 permanent migrants between January 2022 and December 2024, almost 2.8 million people greater than the 177,240 net number of temporary students over that period. Because of their number, these permanent visa holders will have had a much larger effect on the rental market than students because they typically rent before purchasing a home. 

 

Importantly, rents followed inflation, which peaked at over 7% in the December quarter 2022. The rise in rents started after the CPI began to increase in 2020, but since then the total increase in the ABS rent index is similar to the increase in the CPI. As the Reserve Bank raised interest rates to counter this surge in inflation, the cost of investor loans for rental properties increased, and the combination of high inflation and interest rates with a large number of new permanent migrants will have had much greater impact on rents and the rental market than the number of international students.

 

There are over 11 million dwellings in Australia, so the PBSA percentage could be around one percent of the total, but if only a third of dwellings are available for rent the PBSA share would be more significant at up to three percent. Excluding these rooms from housing statistics is a problem, particularly when there are claims international students are crowding out domestic renters. 

 

While the concentration of international students in Sydney and Melbourne affects local rental markets, these temporary migrants are not the main cause of the low vacancy rate or the increase in rents in Australia. The fundamental problem is the slow pace of new residential building resulting in a shortage in supply of rental accommodation at a time when demand has increased from a fall in household size and the total population has increased with a large number of permanent migrants. 

 

The high price of housing is undermining society and the economy

 Alan Kohler’s The Great Divide: Australia’s Housing Mess and How to Fix It

 

There is widespread agreement that the housing market in Australia has developed serious problems. Houses and apartments are too expensive, too hot, and often too far away. There is a shortage of stock, and too few new ones are being built. Opinions on both causes and solutions range from economically irrational to unrealistically ambitious to unhinged optimism, and usually reflect one or another of the many vested interests involved. Federal and state governments have their targets, political parties have their competing policy platforms, developers, builders, banks and manufacturers have their industry associations, owners, tenants and consumers have advocacy groups. Local councils are typically spear carriers for the not-in-my-backyard (NIMBY) movement, but recent elections have seen yes-in-my-backyard (YIMBY) candidates. It is not just the market that’s a mess, the debate over housing policy is as well. 

 

Into this cacophony Alan Kohler is trying to introduce a note of reason with his book The Great Divide. He is a journalist and former editor of the Australian Financial Review, and while not a vested interest he declares himself one of the home owners who have benefited from the increase in house prices over the last few decades. He says that ‘escalation in house prices is a pain that has altered Australian society. It has increased inequality and profoundly changed the relationship between generations – between those who have a house and those who don’t. It has caused a rental crisis, a dearth of public housing and a mortgage crunch’. 

 

The first three chapters outline the problem. Fundamentally, this is because the median house price in Australia has doubled as a multiple of average weekly earnings in the past 25 years, from three to four to seven or eight times, increasing household debt from half to twice average disposable income and from 40% of GDP to 120%. ‘This is the most important single fact about the Australian economy’. Chapter two has data on the housing market and chapter three the history of housing policy. In chapter seven he argues for U.S. style 30 year fixed rate mortgages. Although Australia has the world’s highest house price to income ratio and the 66% of total lending for residential real estate by bank levels is also the world’s highest, Australian banks only provide floating rate mortgages. There are also chapters on homelessness and the global nature of the housing crisis. In this review the focus is on Kohler’s analysis of supply and demand for Australian housing, which includes all types of dwellings (detached and semi-detached houses, town houses, low and high-rise apartments). 

 

The Supply Side

 

Three chapters are on supply problems, covering public housing, Australia’s ‘crowded sprawl’, and state and local governments. In 1945 the Commonwealth State Housing Agreement provided federal funding for public housing, ‘the first and only serious housing policy in Australia’. Between 1947 and 1961 governments built 24% of new housing and home ownership increased from 53.4% to 71.4%, due to war service loans to veterans and the Menzies Government forcing the states to sell public housing. Under Menzies ‘public housing increasingly became a matter of welfare and social services’ rather than the ‘right of every citizen’ as in the 1945 Agreement. The ‘disappearance of public housing removed what had been a steady flow of affordable housing’. Today’s governments are not going start building houses themselves, as they used to, but relying on developers to increase housing supply and improve affordability ignores the basics of the business model of profitable property development, which is to meet demand but not flood the market with new stock. 

 

The second supply problem is the ’crowded sprawl’, the Australian pattern of settlement and urban development. We are crowded into a few large cities despite living on a large continent with a lot of space, 40% of people are in Sydney and Melbourne and over 90% are in capital and regional cities, and our cities are low density, sprawling outwards from a single city centre with houses on large blocks in new suburbs that were built without public transport after cars became affordable. 

 

Finally, while the federal government and banks encourage demand for housing, state and local governments restrict supply through their zoning and planning laws. The local councils and residents of the new post-war suburbs immediately became NIMBYs, and made it impossible for developers to get both sites and permission for medium density town houses and four storey apartments. Australia’s ‘archaic planning laws’ have created cities with high rise apartments around the city centre and low rise to the fringe, and the missing middle of town houses and low-rise apartments ‘remains as much a problem today as it was forty years ago’. While there are many potential sites in existing suburbs that could deliver new homes that aren’t 12 or 20 storey apartment buildings, developing them will need different planning and tax rules.

 

What is missing from Kohler’s analysis is increasing supply using modern methods of construction, like prefabrication and offsite manufacturing. These reduce the time it takes to complete onsite work, and so can increase the number of houses delivered without needing more workers. Currently this is typically used for buildings like schools and hospitals and social housing, for example QBuild in Queensland is manufacturing 600 new houses this year for regional centres, and NSW and Victoria have started prefab social housing programs. Although not the solution to the housing crisis, more government built or purchased prefab for social and affordable housing could play an important role in addressing the problems of homelessness and affordability for low income households if the barriers to adoption were lower and production capacity was increased. 

 

The Demand Side

 

Chapter eight is on the explosion in demand as four factors increased demand for housing after 2000. First, in 1999 the Howard government cut the capital gains tax (CGT) introduced by the Hawke Government in 1985 by 50%, and second, in 2000 reintroduced first home buyers grants. Third, in 2001 the Reserve Bank reduced interest rates, and fourth, between 2003 and 2009 net migration tripled. These boosts in demand were not matched by an increase in the supply of houses.

 

Australia has a unique system of negative gearing, that allows deduction of interest payments and losses on an investment from other income. The Hawke Government banned negative gearing in 1985 but, after a determined campaign, reinstated it in 1987. ‘The halving of CGT was the kerosene on the smouldering coals of negative gearing and the lack of an inheritance tax, and turned property investment into the leaping flame of everybody’s tax avoidance scheme’ as the 50% discount to CGT led to an immediate surge in investor demand for housing. In other countries investing in real estate is for rental income, but in Australia its ‘about getting an income tax deduction and then a capital gain’, and because institutions don’t get the tax deduction they can’t compete to buy sites and there is no build to rent market providing long leases here either.  

 

Adding more fuel to the flames were interest rate cuts by the Reserve Bank in 2001, after a US share market meltdown in the ‘tech wreck’, and investors bought property funded by cheap debt. Also, the Howard government reintroduced first home buyers grants in 2000, also adding to demand. Since then first home buyers grants have been provided by both federal and state governments, but these are ‘political attempts to appear to be doing something while making things worse’. The Homebuilder programme during the COVID pandemic was a particularly egregious example [1].

 

Another of the causes of the housing affordability crisis is excess immigration, and the problem with immigration is that the government doesn’t control it. Most of Australia’s migrant intake has been outsourced to universities and colleges, who see new arrivals as customers rather than migrants. The foundations of this were laid in 2001, when two changes were made by the Howard government when Philip Ruddock was Immigration Minister. First, entry from ‘non-gazetted’ countries like India, Pakistan and China, was opened up and streamlined, and second, there was a more transparent and open pathway to permanent residency for foreign students. The foreign student changes took a few years to get going, but between 2005 and 2008 Australia’s overall migrant intake tripled to more than 300,000 a year. Keeping Australia’s population growth to something approaching the actual capacity of the construction industry to build houses by reducing immigration is not going to be easily done. 

 

The outcome of CGT breaks and negative gearing, lower interest rates, first home buyer grants, and more immigrants, was that after 2000 the ‘nitro of a surge in demand mixed with the glycerine of existing restricted supply to create an explosion that has blown up’ both Australia’s society and economy. There are three other important demand side factors not discussed in the book. The first is the decline in household size, which has fallen from an average 2.9 people in the mid-1980s to less than 2.5 people now, with an increase in the number of one person households. Over the last ten years this trend has increased the number of households by over one million, and thus added a million houses to demand. The second factor is short stay rentals like Airbnb. While these are estimated to account for only 2.2% of long term rental accommodation, in regional towns with limited housing they have had a major effect on both availability and affordability. A third factor is stamp duty acting as a barrier to downsizing from large family homes with empty bedrooms. 

 

Solutions

 

The most important chapter in the book is on potential solutions to the housing crisis. What is striking about Kohler’s ideas is that they are not the standard mix of demand side reforms to tax, or supply side reforms to regulation and planning. He describes their advocates as Tribe 1 and Tribe 2, who have spent the last few decades arguing between themselves for their preferred reform option/s without affecting the housing market or house prices. ‘Solutions by the dozen have been proposed’ but he asks ‘what’s the aim, exactly … what’s the real national mood, and therefore the politics?’

 

The politics are simple. A majority of homes are owned (65%) so two-thirds of the population wants to restrict supply, and owners, banks, developers and state and federal politicians all want house prices to rise for their own reasons. ‘Renters don’t stand a chance.’ Any attempt to address affordability and the shortage of rental accommodation ‘would have to contradict the interests of a majority of citizens and those with the most power.’ And that is why governments have targets that ‘are never actual promises to build anything, just aspirational forecasts’.

 

Improving housing affordability by returning the house price to income ratio back to three to four times, instead of the current seven to eight, would take 20 years of oversupply and stable prices. However, as Kohler says, house prices are not going to halve, so they ‘need to stay put for a while and allow incomes to catch up’. This is difficult when ‘Half of Australia’s home owners are locked into a wealth-creation partnership with a bank’ and ‘everybody regards housing as an appreciating asset’. As a result ‘there is no consensus there is a problem … let alone how to fix it’. 

 

What can be done? First, limit negative gearing to new builds and reduce CGT to 25%. Second, link immigration to construction industry capacity, at around 2.5 times the number of housing approvals. Third, pressure local councils within 30 kilometres of the CBD using both carrots and sticks to increase density. Fourth, increase the cost of holding undeveloped land so developers cannot landbank so profitably. And fifth, extend cities and increase the supply of well-located land (i.e. with access to jobs and services) by building fast trains so commuters can live in regional towns and get into the city in an hour. Not a mythical ‘very fast train’, but a good fast train travelling at 100-150kph would double or triple the commutable distance from the capital cities. 

 

For many years this has also been my preferred solution to the housing crisis. The reason houses are so expensive is that urban land in and around capital cities is expensive, it is not due to the cost of building a house or block of apartments. Cheap land means cheap housing. Currently, government policy on housing affordability is to increase density by building apartments near existing train stations because it costs them less than building new regional railway lines and train stations. 

 

 For whatever reason, Kohler does not include any discussion of financing regional fast trains through betterment taxes, also known as value-capture taxes. These are used to fund projects from the increased value of land when new infrastructure is provided. For example, governments can establish a levy before the preferred routes and sites of train stations and other infrastructure are announced and land values increase. In the ACT, a betterment tax is levied at 75% of the uplift in land value after a site is rezoned, an important point not included in the book. Another, more difficult, option is to allow a private sector consortium to build the railway and finance it through development rights on a corridor of adjacent land. 

 

Conclusion

 

As a journalist who has been covering financial markets and economics for four decades Kohler’s writing is clear and concise, and the measured tone of the book will be familiar to anyone who listens to his nightly finance segment on ABC News. But there is an undertone of anger throughout the book, he argues housing is a ‘stunning failure of public policy’ at all levels that has changed Australian society for the worse. He says ‘My view, and the basis of this book, is … that the high price of housing is undermining social cohesion and the proper functioning of the economy and the nation’. The cost of housing has created a generation of insecure renters and working poor, because the supply of housing is so inadequate. 

 

To solve the housing problem needs a policy with a clear, explicit aim. Kohler argues this should be improving affordability by increasing supply in and around the capital cities. ‘Merely bringing the rate of increase in house prices back to the rate of growth in incomes isn’t enough – that ratio needs to come down so it isn’t a stretch to buy a place to live’. NIMBYs, consumer preference for houses, and construction costs, make building new high-rise apartments in existing inner suburbs difficult, which is why he believes the solution to more housing supply must be fast trains to regional areas that open up cheap land for subdivision. This would be expensive and require federal funding, but ‘every other solution looks too hard’.

 

Over the decades hundreds of reports and research papers on Australian housing have accumulated. However, although Kohler has used many of them, his book is very much a personal statement. He is not an advocate for any industry or other interest groups, but believes the high price of housing is undermining society and the economy and this is a problem that needs to be addressed effectively and quickly. Solving Australia’s housing mess ‘requires true political leadership – that is, doing something right that’s unpopular’. Like so many other key points made in this book, that is both correct and deeply troubling. 

 

Coda

 

After governments shifted the cost of infrastructure like roads, water and sewerage to developers in the 1990s, this is now included in the price of a house instead of the tax system. The GST in 2000 added another 10%, and state governments have increased stamp duty. As a result, 30 to 40% of the cost of a new house is now government taxes and charges. 

 

Tax reform is essential. Windfall gains from rezoning and new infrastructure should be taxed. Housing should be regarded as a right, and on the list of essentials excluded from GST. Halving the CGT discount and restricting negative gearing will reduce demand. 

 

Supply can be increased through innovation, lowering regulatory and financing barriers to modern methods of construction, and streamlining the planning and approvals process. Governments should also address inconsistent national occupational licensing systems and improve support for apprentices to increase labour supply. 

 

Developing and constructing housing requires compliance with layers of regulation by three levels of government on where housing can be built, how housing should be built, and what housing should look like. Other regulations are indirect, such as environmental regulations. These regulations are necessary to ensure safety and quality, but increase the cost of houses, and at a minimum should be reviewed to improve consistency across approvals, certification, compliance and enforcement. 

 

In some places housing policy is based on an assessment of the need for different types of housing, however Australia’s housing targets are for a total number (i.e. total need). But they could be set with different numbers for social rented housing, intermediate rented housing, market rented and built-for-sale homes. 

 

Many European cities zone certain areas with minimum, non-negotiable amounts of affordable and social house building. France requires municipalities to ensure 25% of their housing stock is available for social renting and fines them if they don’t. Vienna has a zoning programme which only grants building permits on the condition of builders meeting affordable and social percentages. These rules get incorporated into the value of land in the zoned areas, which acts to make higher levels of social housing viable. 

 

Currently, residential development land is valued on the basis of maximum profit, and social housing is added in afterwards. Construction costs are high, but it is the cost of the land which makes social housing unaffordable. However, land value is set by what is allowed to be built, and although enforcing a high level of social housing would cut developer profits, the land will be cheaper. The planning system could also require public land which is being repurposed for residential housing be retained by the public sector for social housing developments, instead of being sold off to the highest bidder. 

 

A national tenancy code with 10 year leases and levies on short-term rentals is essential. Other options are removing stamp duty for downsizers, increasing the depreciation allowance on new residential buildings, and taxing developers with undeveloped sites who landbank approved projects. There is no one simple solution to the housing crisis, but there are many ways it could be addressed and incremental small steps might be the only way to make progress. 

 

 

Alan Kohler, 2023. The Great Divide: Australia’s Housing Mess and How to Fix It, Black Inc. 

 

[1] A previous post was on the Homebuilder program

 

 

 

The HomeBuilder Program and Australian Housing

 State and federal governments criticised in COVID inquiry report 

 

The release of the COVID 19 Response Inquiry Report on October 28^th included a section on the HomeBuilder program. This was the third report on HomeBuilder, following a KPMG report on the National Partnership Agreement in 2022 and an AHURI report on Responding to the Pandemic in 2020. There was also a review by PWC for Treasury in 2020. 

 

A book published in 1979 called The Construction Industry: Balance Wheel of the Economy argued counter-cyclical economic policy increased construction during recessions, through expenditure on public projects and the effect on residential building of lower interest rates. This has often been the case, in Australia the Rudd Government increased public expenditure on construction after the 2008 financial crisis and the Reserve Bank lowered interest rates to boost residential work after the mining boom ended in 2014. 

 

From this perspective, HomeBuilder was a conventional policy, introduced to counter the recessionary effects of the COVID-19 pandemic. In 2020 economic activity was decreasing and there were estimates of potential GDP losses of up to 20%. In a 2022 speech the Treasury Secretary Steven Kennedy said: ‘The pandemic was unlike any other downturn in recent history and precipitated the most severe economic downturn since the Great Depression. It was a health crisis before it became an economic crisis. Public health restrictions and cautious behaviour by people who didn’t want to catch the virus severely disrupted daily life and led to a sharp decline in output.’ 

 

Total Australian Government spending on economic support measures was $314 billion, or 15.2% of GDP. In that context, HomeBuilder was a minor program compared to the tens of billions spent on JobKeeper and other transfer payments. However, those were programs administered by the Australian Tax office for a large proportion of the population, whereas HomeBuilder was a targeted program administered by the states and territories with strict eligibility requirements. 

 

This post first outlines the program, followed by the relevant section of the Inquiry report, and the review of the National Partnership Agreement. It assesses the effectiveness and consequences of HomeBuilder. How accurate were the forecasts of expenditure on the program? What were the goals of the program and were they achieved? What were the outcomes? Is it an example of good policy, or of poor policy-making that did not consider industry characteristics and capacity? 

 

Outline of the HomeBuilder Program 

 

The program was introduced in mid-2020 to support residential construction by providing a grant of $25,000. Applicants had to have signed contracts between 4 June 2020 and 31 December 2020 to purchase a house and land package, build a new home, do a substantial rebuild or renovation of an owner-occupied property, or purchase an off-plan apartment or townhouse. Construction had to have commenced within three months of the contract date. On 29 November the program was extended to 31 March 2021, with the grant reduced to $15,000 and the commencement time increased to six months. In April 2021 the construction commencement time was increased to 18 months. 

 

There was an eligibility income cap of $125,000 for an individual or $200,000 for a couple, based on 2018-19 or later taxable income (the lack of clarity here became a source of confusion and an issue for the states and territories). There was also a cap on the value of new builds that differed between states, and on the value of renovations. However, the grant amount was the same everywhere for everyone, and the program itself was uncapped. 

 

The government underestimated take-up of the program. It was forecast to support 27,132 applications totalling $680 million, with the extension expected to add 15,000 applications at an estimated cost of $241 million. However, by June 2024 113,156 applications had been approved and $2.6 billion had been paid. Although applications closed in April 2021, there may be further costs as applicants have until 30 June 2025 to submit documents supporting their applications.

 

HomeBuilder was implemented through a National Partnership Agreement with the state and territory governments, which made the states responsible for administering the program. It was designed to complement existing state and territory First Home Owner Grants Programs, then all states except South Australia gave stamp duty concessions for new builds (whose value varied greatly but might be up to $40,000 depending on the house and location), and Western Australia, Tasmania and the Northern Territory added an extra ‘home building boost’. Combining HomeBuilder with the state and territory schemes, first home buyers in Western Australia and the Northern Territory could access $55,000 in grants, in Queensland, Victoria and Tasmania up to $45,000 in grants, and in NSW $35,000. The federal and state programs are in Table 1.

 

 

Source: AHURI 2020: 15. Responding to the Pandemic. The table does not include the value of stamp duty exemptions.

 

 

The COVID Inquiry Report

 

The report included a couple of interesting data points on construction during COVID. It noted industries with a large proportion of small businesses received most of the JobKeeper and Cash Flow Boost payments, including construction, which received $2.5 billion. These payments were made to employers. There was also a graph of changes to revenue for firms between 2019 and 2020 (p. 582), which showed 45% of construction firms increased their revenue, 30% had decreased revenue by up to 50%, and there were 15% of firms with revenue decreasing by more than 50%. 

 

The report focused on the inflationary effects of HomeBuilder. Between September 2021 and September 2022 the contribution of housing to quarterly inflation was between 20% and 40% of the total change in the consumer price index (CPI). The fiscal stimulus from government grants combined with existing labour shortages, exacerbated by border closures, and pandemic related supply chain disruptions that increased material costs. As a result, the cost of building a house increased by around 30% during COVID. 

 

Table 2. Construction contribution to quarterly inflation (% change)

                                    Sep 21  Dec 21  Mar 22  Jun 22   Sep 22

Construction                  0.35        0.37        0.56        0.52        0.67

Total CPI                       0.8           1.3           2.1         1.8         1.8

Source: COVID 19 Response Inquiry Report 2024: 59. From ABS data. 

 

The inquiry report found the program inappropriate and inflationary: ‘the HomeBuilder program created excess demand in an industry facing supply constraints. This has been a significant contributor to inflation coming out of the pandemic, and the program’s focus on renovations rather than new builds added to the general housing shortages. These types of demand-side stimulus measures are largely not appropriate in pandemics where industries are facing supply constraints’ (p. 549). 

 

A counter-cyclical increase of government expenditure in a recession is a common use of fiscal policy, and the construction industry is often targeted because it is both an employer of many workers and a major source of demand for domestic suppliers. The inquiry report concluded: ‘There are clear indications that the infrastructure measures taken – in particular, HomeBuilder – overheated the industry and contributed to inflation in the post-pandemic era. The program was designed explicitly to stimulate aggregate demand and support the residential construction sector. It acted to stimulate consumption expenditure and lowered the significant household savings built up during the pandemic. However, the measure failed to appropriately take into account the supply-side effects of the pandemic’ (p. 593) 

 

The section of the Inquiry report on HomeBuilder is unsatisfactory because, apart from the 113,156 applications received and the table on CPI, there is no other data. A review of the program that does not include houses commenced and completed, or people employed, is not comprehensive and does not allow conclusions to be drawn on the effectiveness of the program. That data is provided below when assessing the program. 

 

In an immediate response to the report ‘Master Builders Australia CEO Denita Wawn said HomeBuilder was the right policy for the time and should not become the scapegoat for systemic housing challenges.’ At the time of writing no other industry association has publicly commented on the report. 

 

Infrastructure Spending

 

As well as HomeBuilder, Australian governments significantly increased spending on infrastructure during COVID. The Inquiry report found by May 2021 the Commonwealth Government had committed $14 billion to infrastructure projects, and the 2021–22 Budget included an additional $15.2 billion over 10 years for road, rail and community infrastructure. Also in 2021, the New South Wales Government committed to $100 billion in infrastructure work, and the Queensland Government announced projects worth $52 billion. In both cases the projects were expected to be completed over four years. 

 

Figure 1. Engineering construction

Source: ABS 8762. Work commenced by the private sector. 

 

As Figure 1 shows, the public infrastructure projects announced in 2021 were commencing in 2022, and in the five quarters from March 2022 to March 2023 over $57 billion of public engineering work commenced. This was an unprecedented amount, for comparison, in the 2020-21 financial year public engineering work commenced was $21 billion. In 2021 private engineering commencements also began increasing, and both public and private commencements then peaked at the same time in December 2022.

 

 

HomeBuilder National Partnership Agreement Review: Stakeholder Consultation Report

 

The 2022 review of the National Partnership Agreement (NPA) by KPMG found state and territory governments were not consulted on the design or implementation of the HomeBuilder program. The first they knew about the program was when it was publicly announced. This is somewhat ironic, given first the objective of the NPA was to create ‘a framework for the parties to work cooperatively, to provide financial assistance to eligible owner-occupiers to increase residential building and maintain jobs. No administrative funding was provided by the Commonwealth Government for establishing, running and reporting on HomeBuilder, despite the size of the program. 

 

The states and territories were responsible for administering the program, checking eligibility, and compliance and auditing. The review found ‘This created significant implementation challenges for these jurisdictions.’ There were also significant costs associated with assessing eligibility and the principal place of residence of applicants. The report also found insufficient clarity and guidance on the income caps, in the definition of substantial renovation, on citizenship requirements, and for cases where replacement contracts were required. Treasury ‘erroneously assumed’ existing First Home Owner Grant portals could be used. 

 

The review commented on the inflationary effect: ‘It could be said that the HomeBuilder did partially contribute to the constraints in supply of labour, materials and land that resulted from this industry overheating. However, it is critical to note that this would have been just one factor. Broader supply chain issues because of the COVID-19 pandemic were another, and much more impactful, factor.’ (p. 15).

 

Issues raised in the consultations with the states and territories were:

·       Did the eligibility criteria favour middle to high income earners?

·       Was offering the same amount for new build and renovations a fair approach?

·       Did the NPA consider state and territory ‘operating environments and industry contexts’ such as internal migration and their supply and demand balance?

·       Did HomeBuilder only benefit a small number of builders?

 

 

What Were the Outcomes of the Program?

 

The purpose of HomeBuilder was to increase residential building and maintain jobs by providing financial assistance to eligible owner-occupiers. Both of those objectives were achieved. The total number of people employed in construction in August 2020 was 1,145,814, a year later in August 2021 it had fallen to 1,114,644, but by August 2022 it was 1,251,601. Construction employment continued increasing through 2023 and 2024, reaching a record high of 1,358,239 in May 2024. 

 

As Figure 2 shows, residential commencements increased rapidly after the program started in mid-2020. The 42,475 houses commenced in the June quarter 2021 was an all-time record, well above the quarterly commencements of around 30,000 during the housing boom between 2015 and 2018. The increase for apartments was not as dramatic, although still substantial, rising from 15,070 in the September quarter 2020 to 22,913 in the June quarter 2021. 

 

Figure 2. Number of dwellings commenced

Source: ABS 8752

 

The combination of HomeBuilder induced demand with COVID supply chain disruptions had three effects on residential construction. First was the increase in completion times for houses. As Figure 3 shows, the industry usually delivers between 25,000 and 30,000 houses a quarter, less in the March quarter because of the January holiday, with most houses completed within 12 months. It took three years, until the December quarter 2023, to complete the extra 100,000 houses commenced in 2020 and 2021 during HomeBuilder [1]. There was less effect on apartment completions because the number of commencements was well below past record levels, so the volume of work was within industry capacity not above it. 

 

Figure 3. Number of dwellings commenced and completed

Source: ABS 8752

 

Second was the increase in the cost of inputs. Some of the materials and component price increases were due to global factors, but there were also significant increases in domestic prices and labour costs. As Figure 4 shows, the ABS input price index increased from 120 in December 2020 to 154 in December 2022.

 

Figure 4. Housing costs 

Source: ABS 6427

 

In the 12 months after the surge in commencements due to HomeBuilder, between the December quarter 2021 and December 2022, the price of basic inputs such as timber, plywood, glass, cement and steel all increased by around 15%. Some of the increase was due to higher energy and freight costs, and the other materials category was affected by plaster products because of a global price increase for gypsum. However, the main driver of these price increases was the high level of demand created by HomeBuilder and also, for concrete and steel, infrastructure projects. 

 

Figure 5. Construction input price changes to December quarter 2022

Source: ABS 6427

 

The increase in house building costs differed across the states. In the Reserve Bank’s November 2024 Statement on Monetary Policy the RBA commented: ‘Labour costs continue to contribute to ongoing cost growth, partly driven by the large pipeline of construction work and ongoing labour shortages for certain trades. Outcomes have varied across capital cities. Year-ended new dwelling cost inflation has returned to around its pre-pandemic average in Sydney, Brisbane and Hobart. By contrast, new dwelling cost inflation in Perth has increased further in year-ended terms, consistent with high demand for new homes and increases in labour costs’. The accompanying graph highlights how rapid and extreme the pandemic cost increases were.

 

Figure 6. Capital city cost inflation

Source: Reserve Bank of Australia, Statement on Monetary Policy, November 2024. 

 

 

Third was the increase in insolvencies between 2022 and 2024, as many builders on fixed price contracts entered into during HomeBuilder were unable to continue after cost inflation led to losses on those projects. Because of measures put in place to support industry during the COVID pandemic there were fewer insolvencies than usual in 2021-22, with a total of 1,639 construction businesses going into administration. The numbers for 2023 and 2024 show a substantial increase in total insolvencies from 2,812 to 3,882.

 

Figure 7. Construction insolvencies

Source: Australian Securities and Investment Commission

 

 Conclusion

 

A counter-cyclical increase in government construction expenditure is a common use of fiscal policy. However, the COVID Inquiry report concluded: ‘There are clear indications that the infrastructure measures taken – in particular, HomeBuilder – overheated the industry and contributed to inflation in the post-pandemic era.’

 

The purpose of HomeBuilder was to increase residential building and maintain employment, and it succeeded in both of those. There was a small decrease in total construction employment in 2021 of around 30,000, followed by a steady increase to a record 1,358,239 people in 2024. The program quickly increased housing commencements to record levels, but completion times increased and it took three years to complete the extra 100,000 houses commenced in 2020 and 2021.

 

The size of the program was uncapped and Treasury significantly underestimated the number of applications [2]. Their forecast for the cost of the program was $680 million, and the extension $241 million but, instead of $921 million, by June 2024 $2.6 billion had been paid. Although HomeBuilder was a minor program compared to the tens of billions spent on transfers through the Australian Tax office, it was targeted at a specific industry and administered by the states and territories. 

 

Over time the effects of the sudden increase in commencements financed by HomeBuilder became less positive. The COVID Inquiry report focused on the inflationary effect of the rapid increase in demand on the cost of housing, which accounted for up to 50% of CPI increases in 2021-22. The report concluded the demand side stimulus was not appropriate and ignored the supply side effects. The increase in residential commencements was not only due to HomeBuilder, which combined with first home owner grants, stamp duty exemptions, and other incentives given by state governments, all of which added to the excessive level of demand. 

 

Likewise, the increase in materials and component prices was not only due to HomeBuilder. Both the Commonwealth and the states also increased expenditure on infrastructure during COVID, which added to the inflationary effects. In the five quarters from March 2022 to March 2023 over $57 billion of public engineering work commenced, a record amount, and both public and private engineering construction commencements peaked at the same time in December 2022. 

 

There was a notable failure in policy making in 2020, governments and their advisors should have decided to target either residential building or engineering construction for stimulus. To simultaneously do both showed a poor understanding of construction industry characteristics and capacity, and ignored the obvious domestic and international supply side constraints during the pandemic. Also, governments would have been aware of rising private sector engineering expenditure when increasing their own spending. There is no evidence of industry being consulted or asked for advice at any point while these decisions were being made. 

 

The consequences of these poor policy decisions by state and federal governments have now become apparent. Over 8,000 construction businesses have become insolvent since 2021, many because of losses on fixed price contracts entered into under HomeBuilder, affecting thousands more customers, subcontractors and suppliers. The cost of inputs to housing construction have increased by around 30% since 2020, increasing house prices and making new houses unaffordable for many first home buyers. Further, the build cost of new apartments is now above the price of existing stock, so the apartment market is broken. Infrastructure projects have had cost increases and delivery delayed. 

 

There is a long tradition of increasing government expenditure on construction to counter economic downturns, however HomeBuilder was not good policy. Rather, when combined with the increase in public infrastructure spending, it is an example of reactive over-reach and poorly considered policy-making. Over the last two years inflation, and therefore interest rates, would have been substantially lower without HomeBuilder, as would house prices. That may be hindsight, and with COVID the circumstances were extreme. Nevertheless, the program did not take into account the characteristics and capacity of the construction industry, and at no point attempted to address the important supply side issues the industry had to deal with. Unfortunately, the implementation and size of the program demonstrated little understanding of the industry by governments and their advisors.

 

                                                                      *

 

[1] In the Australian Financial Review (1.11.2024)  the Stockland CEO Tarun Gupta was quoted: ‘pre-COVID it took his company 16 weeks to build a home, it doubled to 32 weeks in the pandemic, and is back to 20 to 22 weeks. He dubs it a new “resistance level”. Likewise, he says civil works for a 300- or 500-lot precinct used to take 26 weeks, blew out to 42 weeks in Victoria (the worst state at the time) and is back to 32 to 34 weeks.’

 

[2] None of the reviews of HomeBuilder looked at the Treasury forecasts or asked why they were so far off the mark.