Negative Gearing and Housing Supply

  How significant for housing supply are loans to investors for new construction?

 

 

 

Negative gearing is a tax policy that allows property investors to offset losses from rental properties against taxable income. Its effect on housing supply and affordability is controversial, with some arguing negative gearing encourages investment in rental properties and increases housing supply, while others argue most of that investment goes into existing properties, so negative gearing increases demand for rental properties and drives up prices, making it more expensive for first-home buyers. However, the effect of negatively geared investor loans on housing supply is not as clear as the effect on house prices. There is nothing in negative gearing to specifically act as an incentive for construction of new homes, but that does not mean it does not increase the supply of housing.  

 

The Australian Taxation Office definition of negative gearing is: ‘A rental property is negatively geared if it is purchased with borrowed funds and the net rental income, after deducting expenses, is less than the interest on the loan.’ With a negatively geared property the taxpayer makes a loss, but that loss is tax-deductible against other income, including ordinary wages and salaries, and thus other taxpayers help the property investor meet the costs. investors know rental returns are less than operating and interest costs but they expect property values will increase so losses will be more than covered by capital gains when the property is sold. The higher the income of the taxpayer the more favourable this type of gearing becomes. 

 

Two examples of arguments for increased supply are reports for the Property Council in 2014 and 2019. The 2014 report  by ACIL Allen claimed around a third of all loans for new dwelling construction were to investors and it was a myth that negative gearing does nothing to support housing supply. The later 2019 report by Deloitte Access Economics found limiting negative gearing to new housing and reducing the Capital Gains Tax (CGT) discount from 50% to 25% would lead to a decline in prices for new property of 3.6% by 2030 that ‘in turn results in a decline in dwelling commencements which is estimated to be 4.1% below baseline in 2030. The decline in commencements each year reduces the stock of dwellings over time … The stock of dwellings is estimated to be 0.4% lower by 2030.’ 

 

This post addresses the question of the significance of negative gearing for supply of new housing. It starts by looking at the data available from the Australian Bureau of Statistics on lending to investors, then compares the data on loans to investors for new construction to the building approvals data, and finally the Australian Tax Office data on deductions for rental properties is considered.  

 

Lending For Dwellings

 

Australian Bureau of Statistics’ Lending Finance data shows over half of the value of new lending is to investors, and ABS census data shows nearly a third of existing properties are owned by investors. How significant for supply of new housing are loans to investors for new construction?

 

Although a lot of lending for dwellings goes to owner occupiers in Australia, since 2019 the share of lending to investors for dwellings has been increasing. This went from 29% to 38% for the number of dwellings and from 39% to 60% for the value, in Figure 1. While these are the headline numbers often used when discussing negative gearing, they are not relevant to the supply of new housing because the great majority of this lending to investors is for established housing, not new construction. 

 

Figure1.  Investor share of total lending for dwellings

 
Source: ABS 5601.

 

Between 2019 and 2024 the shares of lending to investors changed, as the proportion of investor loans for new construction increased from around 11% to 14.5% of the number of dwellings and from about 10% to 14% of the value, while lending for newly built dwellings more than halved over the period, from around 11% to under 5%. As a result, their combined share for new dwellings of total investor lending has fallen from 22% to 19%, which is not insignificant. As Figure 2 shows, over the last two years the growth of lending for existing dwellings has been much faster than lending for new construction. 

 

Figure 2. Lending to investors for dwellings

 
Source: ABS 5601. These ABS data series begin in September 2019.

 

For housing supply the investor loan share for construction new dwellings of total lending is the important point, and that share is only 6% of the number and 8% of the value, in Figure 3. That share is very low because so much more lending goes into existing properties. However, although this suggests investor loans play a marginal role in the supply of new housing, and not all investors are negatively geared, this is not the whole story.

 

Figure 3. Lending to investors for construction of new dwellings

 
Source: ABS 5601. These ABS data series begin in September 2019.

 

Building Approvals 

 

Comparing the number and value of investor loans for new construction of dwellings to building approvals shows the role of investors in housing supply has become more important over the last few years. In 2019 the shares of investor loans for new construction were 8% of the number of private sector building approvals for dwellings and 10% of the value, but in 2024 they had increased to 16% and 21% of the number and value respectively, in Figures 4 and 5. These are more significant shares than those in the lending data. 

 

Figure 4. Investor loans for new construction and number of building approvals

 

Source: ABS 8731 and 5601.

 

The increase in the investor share of building approvals is a combination of a decline in approvals since 2021, which can be attributed to the 30-40% increase in costs since then, and the increase in investor loans noted above. The increase in the share of the value of both investor loans for new construction and the share of building approvals suggest this is funding for houses rather than apartments or medium density development. 

 

Figure 5. Investor loans for new construction and value of building approvals

 

Source: ABS 8731 and 5601.

 

 

The 16% investor share of the number of dwellings approved is significant. There are, however, two caveats to this. The first is that not all approvals become commencements, although most do eventually get started. The second is that not all investor loans are negatively geared. 

 

Australian Tax Office Data

 

The most recent ATO statistics are for the 2021-2022 financial year because of the time taken to submit and process returns, so there is no data for the last two years. The share of investors who are negatively geared rises and falls with changes in interest rates. During the financial crisis in 2008 when the cash rate was 7.25% the share of negatively geared rental properties was over 69%.  As Figure 6 shows, in the years before before 2019-20 total net rental income was negative, but as the cash rate fell to 0.1% in 2020 total deductions also decreased and the share of negatively geared rental properties fell below 50%. Table 1 has the same data going back a few more years to 2014-15.

 

Figure 6. Total rental income and deductions

 Source: ATO Taxation Statistics Individuals

 

 

Table 1. Total rental income and deductions, $ billion

Source: ATO Taxation Statistics 

 

In the ATO data going back to 1999-2000 the majority of investors have been negatively geared, and since 2002 it has been between 60% and 70%. As Figure 7 shows around 60% of rental properties were negatively geared in the six years before 2019-20. Because interest rates were at record lows in 2020-21 and 2021-22 the number of negatively geared properties fell to 47% and 42%. With the increase in the cash rate after 2022 to 4.35% in 2024 the share of negatively geared properties should be trending upward to the long-run level of over 60%.

 

Figure 7. Number of rental properties by rental outcome

 

Source: ATO Taxation Statistics 

 

What is not in the data from either the ATO or the ABS is the share of negatively geared investor loans for new construction, the question this post is addressing. The assumption can be made that the share is the same 60 to 70% for new builds as for negatively geared existing properties, but there is no way of knowing if that is the case. In all likelihood it is less, possibly much less, because investing in a new build would be seen by the typical negatively geared investor, who has one property, as more risky than an existing dwelling. The ATO data has 70% of investors with one property. 

 

Of the investor loan share of 16% of the number of building approvals, if around a third are negatively geared then the 16% becomes 5 or 6% of building approvals, if it were half then 8% of the number of approvals would be negatively geared. Even at the high range assumption of two thirds of investor loans for new construction being negatively geared, that is barely more than 10% of approvals.

 

Conclusion

 

Negative gearing is a tax incentive that allows investors to deduct rental property losses from other income. Australian Bureau of Statistics’ Lending Finance figures show about 85% of investment in rental properties is for purchase of existing properties, not building new ones. Because it increases demand for rental properties, this drives up prices for existing properties, making it more expensive for first-home buyers. However, the effect of negatively geared investor loans on housing supply is not as clear as the effect on house prices. There is nothing in negative gearing to specifically act as an incentive for construction of new homes, but that does not mean it does not increase the supply of housing.  

 

Between 2019 and 2024 the share of lending going to investors for dwellings went from 29% to 38% for the number of dwellings and from 39% to 60% for the value, The great majority of this lending is for established housing, not new construction. The proportion of investor loans for new construction increased from around 11% to 14.5% of the number of dwellings and from about 10% to 14% of the value, while lending for newly built dwellings fell from 11% to under 5%. For housing supply, the investor loan share for construction new dwellings of total lending is only 6% of the number and 8% of the value. The higher share of the value of investor loans for new construction and suggests this is funding for houses rather than apartments.

 

The role of investors in housing supply has become more important. In 2019 investor loans for new construction were 8% of the number of private sector building approvals for dwellings and 10% of the value, but by 2024 had increased to 16% and 21% of the number and value respectively. That 16% share of the number of dwellings approved is significant, but not all approvals become commencements, although most do eventually get started, and not all investor loans are negatively geared. This rise in the investor share of building approvals is due to the combination of a decline in approvals since 2021 and the increase in investor loans. 

 

Australian Tax Office data going back to 1999-2000 shows the majority of rental properties have been negatively geared, with between 60% and 70% negatively geared before 2019-20. Because interest rates were reduced to 0.1% in 2020-21 and 2021-22, negatively geared investors fell to 42% of properties. With the increase in interest rates after 2022 the share should be trending back toward the long-run level of 60% or more. 

 

The data from the ATO and the ABS does not give the share of negatively geared investor loans for new construction, the question this post addresses. An assumption has to be made. Is the share the same 60 to 70% for new builds as for existing properties? Probably less, possibly much less, because investing in a new build would be seen by the typical negatively geared investor, who has one property, as more risky than an existing dwelling. Of the investor loan share of 16% of the number of building approvals, if around a third are negatively geared then the 16% becomes 5 to 6% of building approvals, if it were half then 8% or at two thirds slightly over 10% of the number of approvals would be negatively geared. 

 

At between 5 and 10% of building approvals for new dwellings, negatively geared investor loans do not play an important role in the supply of new dwellings, and they are more likely to be for houses than apartments. To increase supply better targeted policies are needed and would be more effective. 

 

Recent Developments in MMC in Australia

  Increasing industry capacity and funding

 

Over the last few months there has been significant progress in advancing the use of modern methods of construction (MMC) in Australia. MMC ranges from products and kit-of-parts to prefabricated components to modular and volumetric buildings. This post looks at these developments and assesses the current use of MMC in Australia.

 

The post has three sections. The first is on the Commonwealth Government and national developments, covering the Australian Building Codes Board’s Prefabricated, Modular and Offsite Construction Handbook, the March budget and National Productivity Fund, the, the National Construction Industry Forum’s draft Blueprint for the Future, and the Commonwealth Bank of Australia’s MMC financing initiative.

 

Ther have also been developments around the states. NSW has a MMC Taskforce, in Queensland there was a change of government however no changes to the MMC policy have been announced. Western Australia is building industry capacity, and there have been deliveries of social housing in South Australia, Tasmania and Victorie.

 

Commonwealth Government and National Developments

 

ABCB Prefabricated, Modular and Offsite Construction Handbook

 

The Australian Building Codes Board (ABCB) is the agency responsible for the National Construction Code (NCC), and the WaterMark (plumbing) and CodeMark (product) Certification Schemes. The Handbook does not introduce any new standards, but ‘has been developed to increase the understanding and effectiveness of existing building standards and regulations’ and to answer ‘questions about determining evidence to support compliance and common NCC compliance risk areas.’

 

The Handbook published in December 2024 is not ‘a document that sets out specific compliance advice for developing solutions to comply with the requirements in the NCC.’ The emphasis is on Deemed-to-Satisfy (DTS) compliance when applying the NCC to residential buildings and shows: 

1. How to determine the evidence required to demonstrate NCC compliance and fitness for purpose through documentation. 

2. How to avoid common NCC compliance risks that affect MMC and other products. 

 

The Handbook notes some products only require relatively simple evidence to demonstrate compliance. However, ‘complex products, including volumetric forms of construction may be subject to multiple NCC requirements and require extensive documentation to demonstrate compliance.’ Key points are 

·      Buildings using MMC, including prefabricated and modular buildings, are regulated in the same manner (except for plumbing products) as other construction products.

·      There are 3 compliance pathways: DTS Solution, Performance Solution, or a combination of the two.

·      The Handbook includes a 4-step approach to assist determining the evidence to demonstrate fitness for purpose and NCC compliance.

·      Fitness for purpose is supported by evidence of suitability and construction/installation in an appropriate manner.

 

The Handbook does not address state and territory legislation covering planning, building and plumbing approvals, licensing, and mandatory inspections, and does not cover ‘the end-to-end process of the use of MMC … nor does it provide a how-to-construct or how-to-install manual for the thousands of products and MMC in use.’

 

Given the extent of what the Handbook does not include, how much of a contribution does it make to promoting MMC? First, it establishes the requirement to comply with current standards using the compliance pathways available, and the explanation of how to establish fitness for purpose is useful. Second, by discussing specific forms of MMC like precast, SIPs, wall panels, floor and roof systems and light gauge steel the Handbook is an important first step in determining evidence on compliance with the construction code. 

 

March 2025 Commonwealth Budget

 

In the pre-election March budget the Albanese Government allocated $54 million to MMC, with $49.3 million to help states and territories develop programs to support MMC, and $4.7 million towards the  voluntary certification process announced in November 2024. There are no details on what exactly this funding will cover, who will do it and  how certification will be done, what might be in the MMC programs and whether they will be coordinated across the states is unknown, and approaches using volumetric, modular and kit-of-parts are not explained. 

 

The budget allocation adds to funding in the $900 million National Productivity Fund announced in November by the Treasurer, which included an unspecified amount for removing barriers to MMC and improving development approval processes. 

 

The Commonwealth also currently has two working groups, One is on MMC as part of a National Construction Strategy. The second is a Federal Treasury Workshop on Removing Barriers to MMC Finance. Ther are no reports from those groups available. 

 

NCIF Blueprint for the Future of Construction

 

In March the National Construction Industry Forum released their draft Blueprint for the Future: A building and construction industry that works for everyone. The Forum is an advisory body under the Commonwealth Department of Employment and Workplace relations with 16 members from industry associations and unions and three ministers. 

 

‘The Blueprint sets a path to address challenges and build a stronger construction industry. The NCIF identified eight themes, with associated challenges that included insights like contracts are unfair, procurement focuses on price, there are skills gaps, and under Financial Viability ‘Limited investment in innovation e.g. modern methods of construction, digitisation.’ This is the sole mention of MMC in a document called Blueprint for the Future. The following section on Opportunities includes contracts, security of payment, phoenixing and insolvencies, but not MMC. 

 

Figure 1. NCIF themes

 

Source: NCIF Blueprint

 

The Blueprint is the latest in the long sequence of worthy, wordy, and optimistic documents that clearly explain the issues and problems, identify potential responses and remedies, and promote collaboration and cooperative tripartite solutions. How many of the 45 Opportunities it suggests exist will be realised is an open question, but the history of these proposals is not encouraging. For example, security of payment and the apprenticeship system have been reviewed and recommendations made but little has changed, phoenixing has not been addressed by ASIC for decades, proactive enforcement of regulations requires resources, and there have been numerous industry charters and codes of conduct. There is no commitment to any specific action by the members of the NCIF, and not recognising MMC (if done well) as a major element in future construction is a glaring oversight. The NCIF future looks very much like the present.  

 

Commonwealth Bank MMC Financing

 

In January the Commonwealth Bank of Australia became the first bank to endorse MMC and provide financing, when CommBank announced a partnership with prefabAUS, and became the organisation’s first bank member. The bank agreed to sponsor the development of a standard form contract for MMC to simplify and speed up the process of financing a prefab home. 

 

Limited to fixed price contracts for offsite work up to $1.5 million, CommBank offers construction financing while a prefab home is being built offsite, for the lowest of 120% of the land value or up to 60% of the contract price, or 150% and up to 80% from a manufacturer accredited by the bank. After final completion the home is inspected and the rest of the construction finance is released. 

 

In October National Australia Bank announced $6 billion in funding for affordable and specialist housing by 2029, with modular construction playing a key role. 

 

ABCB Building Product Registration Scheme Proposal 

 

In September the ABCB opened public consultation for a month on a proposed risk-based Building Product Registration Scheme, aimed at addressing product conformity and traceability issues. Minimum standardised information for all building products would be required, with traceability through labelling and a national product register, compulsory registration of high-risk products, and voluntary registration for other products. It will take years for the scheme to be implemented.  At the Offsite 2024 conference Gary Rake, the CEO of the ABCB, included the slide below. 

 

Figure 2. Building Product Registration Scheme

 

Source: G. Rake Offsite 2024

 

On building products, in January 2025 the European Union’s Construction Products Regulation replaced the 2011 framework. This introduced Digital Product Passports (DPPs) to provide performance metrics, and compliance with sustainability and safety standards. For modular construction, DPPs presents significant opportunities because they enable tracking of prefabricated components through their lifecycle. 

 

 

Around the States 

 

New South Wales

 

In March 2025 the NSW government released its industry policy, covering housing, net zero and the energy transition, and local manufacturing, The policy links modular construction to increasing housing supply and affordability. 

 

In August 2024 the Building Commission NSW released a position paper for consultation on Regulation of Prefabricated Buildings for a new building bill that would include MMC. The paper redefined prefabricated buildings as ‘building work’ not ‘building products’, and showed the stages in the delivery of a prefabricated building (Figure 1A), highlighted the role of the certifier and proposed consumer protections (Figure 1B). The draft of a new building bill has not yet been released. 

 

Figure 3A. MMC stages

 

 

Figure 3B. MMC certification and consumer protection

 

Source: NSW MMC Position Paper

 

 

In the 2023-24 budget the Minns government committed $10 million for modular social housing trials. In July 2024 four sites in Port Macquarie and three in Wollongong were announced. 

 

The Modern Methods of Construction Taskforce was established in November 2023 to investigate the ‘use and potential for off-site manufacturing in NSW Government housing projects.’ The Taskforce has met twice, with the last meeting in June 2024. Meeting notes are on the website. 

 

In May 2024 the Homes NSW MMC Procurement list was opened for suppliers who provide off site manufacturing and prefabricated products. In March 2025 there were 28 suppliers on the list.  

 

The Homes NSW MMC Program commenced in May 2024 as a partnership with the Building 4.0 Cooperative Research Centre (CRC) focused on developing strategies and methods to utilise MMC to deliver quality social housing faster. The Program aims to define products and components for design and construction of medium density homes (4-6 storey buildings) using a standardised kit-of-parts manufactured offsite (i.e. bathroom, kitchens, balconies).

 

NSW Department of Education 2024 Pattern Book set out standardised, repeatable designs for schools and preschools, and promotes modular and prefabricated construction for 3 storey new schools. Other school buildings including halls, COLAs, pre-schools, single and double storey buildings will be added to the 2025 Pattern Book.

 

 

Queensland

 

There was a change of government in October 2024 when the Crisafulli LNP replaced the Miles Labor government. So far there have been no changes to the MMC programs of Homes for Queenslanders or QBuild announced. 

 

The Homes for Queenslanders policy aims to deliver 53,500 new social homes by 2046, The Miles Government June 2024 budget included $2.8 billion for up to 600 modular homes in 2024-25, with the goal of social housing production of 2,000 homes by 2027-28. There are 11 industry partners: Ausco, Fleetwood, Hutchies Modular, Modscape, Blok Modular, Eco Cottages, James Engineering, ModnPods, Saltair Modular, Volo Modular, and WestBuilt.

 

In February two modular homes were delivered to Thallon in South West Queensland, as part of the Quickstarts Queensland initiative, built by Oly Homes. By October 2024 Fleetwood had delivered 40 of 60 homes contracted. In September a Cairns project commenced for 490 homes built by Modscape and FCC Construction, funded by ANZ, Housing Australia and the Commonwealth and State Governments. 

 

QBuild has three Rapid Accommodation and Apprentice Centres for MMC, in Brisbane at Eagle Farm and Zillmere, and Cairns. Qbuild has standardised floor plans for four house types: studio; 1 bedroom; 2 bedroom; and 3 bedroom.  

 

Victoria

 

In December 2024 the Federal and Victorian governments announced joint funding for a $50 million Future of Housing Construction Centre of Excellence (FHC CoE) at Melbourne Polytechnic’s Heidelberg campus, the first training facility in Australia focused on MMC, expected to start in a temporary location in mid 2025.

 

In September 2024 the Victorian Prefabricated Construction Directory was published, with profiles of 24 firms using MMC in Victoria. All were manufacturers, eight firms coved all five capabilities of architecture, assembly, engineering, manufacturing and project management. 

 

Western Australia

 

Before the March election the Cook Government said If re-elected it will commit $50 million to boost modular and prefabricated housing. The Housing Innovation Program will provide competitive grants of up to $3 million for WA-based businesses involved in modular or prefabricated housing. 

 

In addition to grants, the government will allocate $20 million in low-interest loans to help businesses adopt new technologies and expand their operations. Opportunities identified include automation in steel frame and concrete slab manufacturing, enhanced wall and ceiling construction processes, and expanded capacity for window, door, and cabinetry production. There is already an $80 million allocation for transportable classrooms by 2026. 

 

In February 2025,16 modular tiny homes for Geraldton were commissioned from Summit Modular for delivery in mid-2025. In January three new modular homes in Manjimup were delivered by Fleetwood. 

 

In October 2024 eight two-bedroom modular social homes in were completed, built by Murray River North and Modularis. In September the Federal and WA Governments provided $6.3 million for 12 social modular homes built by Dale Alcock Homes in Perth.  In August Sheraton College opened a modular two storey building from Ausco Modular. 

 

South Australia

 

In March Renewal SA’s Office for Regional Housing began a pilot program of six homes, expected to be completed by September 2025, constructed using SipForm structural insulated panels (SIPs), a prefabricated building system manufactured in Perth. 

 

Tasmania

 

In February six new modular units were installed in Burnie, built offsite by Podmatrix. The government has a target of ‘more than 200’ modular homes over the next four years.

 

The Chandler Critique

 

David Chandler became the inaugural NSW Building Commissioner in 2019 after the Mascot Towers building failure highlighted the extent of building defects and non-compliance with the NCC. He was responsible for implementing the NSW construction reform strategy, establishing the Building Commission with 400 inspectors, introduced the iCIRT ratings scheme for developers and contractors, and decennial liability insurance for apartment buildings. By the time he stepped down in 2024, his focus on consumers and compliance had begun restoring public confidence in new housing.

 

Soon after finishing as Building Commissioner, he gave a presentation on MMC at the Offsite 2024 Conference. His concern was that ‘An unregulated MMC market could introduce a new cohort of modular building defects.’ Chandler has supported MMC for many years, for example he was involved in setting up the Centre for Smart Modern Construction at the University of Western Sydney in 2017. However, in his presentation he argued there are unresolved issues with MMC, such as integration of components, fire and water management, training and qualifications of workers, compliance of offshore suppliers and quality of components. He emphasised the lack of performance measures and data on MMC. The slide below is from the presentation with a list of issues that he believes need to be addressed.

 

Figure 4. Chandler MMC issues

 

Source: D. Chandler Offsite 2024

 

Since then he has frequently posted on LinkedIn about his concerns with MMC and its focus on producers rather than consumers. A lightly edited version of his post in response to the announcement of the CommBank financing of MMC is below:

 

‘Funding for prefab leaves many questions unanswered. Bringing Prefab Housing into the mainstream construction domain has been the quest of many for nearly 2 decades in Australia. Despite government endorsement, research grants, policy announcements and uptake by social housing organisations, there is still no clear regulatory or legal framework for this procurement method. 

 

The first question deals with what building contracts are proposed to be covered by the prefab off-site payment arrangement? Who are the parties to these transactions. Will the home purchaser be required to authorise these payments? Will the home purchaser be protected by a Home Building Insurance Scheme if the builder of record has engaged or has been given permission by the home purchaser to procure between 60 to 80 percent of the build cost by way of prefab. Will the builder of record (which may include a licensed prefabricator) be satisfied that the on-site components of the work are adequately provided for? How might unforeseen variations be dealt with, especially with high LVR loans. 

 

What criteria will CBA deploy to distinguish an accredited v unaccredited player? Will off-shore prefabricators be included in the mix? What happens if the prefab provider goes broke before the house is completed? There could be the discovery of building non-compliances post the occupancy of substantially prefab buildings. There could be a mixture where both on-site and off-site inputs give rise to a serious defect. What then? 

 

There is a need for a full disclosure about all these issues, not just in the lender's interests, but more importantly for the borrowers. I am a proponent of modernising Australia's construction industry including the embrace of MMC. This evolution must start out as customer facing, or it runs the risk of undermining years of good work … unless consumers, compliance and public confidence become the centrepiece of these conversations, they are bound to end in tears.’

 

In a September 2024 interview Chandler argued for single-point accountability, ensuring one entity is responsible for the entire project, from design and manufacturing to onsite assembly, to create clear lines of responsibility and reduce the chaos caused by fragmented accountability.

 

Conclusion

 

In April 2025, what progress has been made in the promotion of MMC in Australia over the last year or so? One positive development was the Commonwealth Bank agreeing to provide mortgage finance for prefabricated houses. Another was the ABCB Prefabricated, Modular and Offsite Construction Handbook on determining evidence on MMC compliance with the construction code, a first step in the long process to arrive at a set of standards for MMC and a product compliance regime with digital product passports in Australia. There was also an unspecified amount for removing barriers to MMC and improving development approval processes in the National Productivity Fund announced in November.

 

Funding of $160 million for industry development is promised from governments. There is $50 million on offer from both the Albanese Commonwealth Government (if re-elected in May) and from the recently re-elected Cook Government in Western Australia, and $10 million from the Minns Government in NSW for social housing trials. The Federal and Victorian governments are funding a $50 million Future of Housing Construction Centre of Excellence in Melbourne. 

 

In Queensland QBuild has three MMC centres operating and the Homes for Queenslanders program is still running, which will deliver possibly hundreds of prefabricated houses this year. Western Australia is building capacity and has delivered several projects over the last year. NSW, South Australia, Tasmania and Victoria have small scale prefabricated social housing programs. There continues to be demand for institutional buildings like schools and hospitals, particularly for regional and remote locations. All this adds up to steady if not spectacular production of MMC buildings for the public sector. However, the number and value of private sector deliveries of prefabricated buildings is unknown, as is the extent of prefabrication 

 

NSW established a MMC Taskforce and in mid-2024 released a position paper for consultation on Regulation of Prefabricated Buildings for a new building bill that would include MMC. The paper redefined prefabricated buildings as ‘building work’ not ‘building products.’ The 2024 Homes NSW MMC Program is a partnership with the Building 4.0 Cooperative Research Centre on developing strategies and methods to utilise MMC to deliver social housing. The 2025 industry policy linked modular construction to increasing housing supply and affordability.

 

Therefore, on the one hand, there is currently substantial funding on offer for industry development from the Commonwealth and three state governments, and there continues to be institutional buildings and prefabricated social housing in regional areas delivered. On the other hand, when and what that funding will actually be used for is still unclear, and prefabrication is still reliant on public sector clients. There are also many unresolved issues with MMC, such as certification and product compliance, the regulatory and legal framework (which is what the funding seems to be directed at), the lack of standards and slow progress on updating the National Construction Code. 

 

 

 

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.