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The real reasons for Australia's housing crisis

By Brendan O'Reilly - posted Monday, 27 March 2023

Australian house prices and rentals are amongst the most expensive in the world.  Sydney was recently ranked the second least affordable city in the world after Hong Kong, with Vancouver in third place.  Other Australian cities were also highly ranked, with Melbourne the ninth least affordable, Adelaide the fourteenth and Brisbane fifteenth.  High construction costs, restrictive planning regulations,and government charges on developers are major contributing factors to high dwelling prices.  In the ACT, the government's land monopoly and restricted land releases are major influences on high land prices in that jurisdiction.

Statistics (and good old supply and demand) tell the recent tale of our housing shortage.

In January 2023 total dwellings approved fell 27.6 per cent (seasonally adjusted), while private sector dwellings approved (excluding houses) fell a whopping 40.8 per cent.  Rental vacancy rates dropped by 36.1 per cent nationally in the year to January, according to, while rents continued to soar.  Its data show that the national rental vacancy rate fell to its lowest point on record - 0.8 per cent - in that month.  Other sources show the same trend, though their absolute figures are not quite as low.  According to PropTrack, the rental vacancy rate is now half the level seen before the pandemic.  With reduced building activity and plans for a surge in immigration, housing shortages are only going to get worse.


As far as provision of housing is concerned, private supply dominates.  According to the 2021 Census, our housing stock consists of 6.2 million owner occupied dwellings and 4.7 million rented dwellings, with only about 350,000 of the latter being comprised of state or community housing units.  Overall, Australia is overwhelmingly dependent on privately provided housing.  If the incentive for investing in housing is reduced, the housing shortage worsens, which is what has happened.

A key driver of investment in housing is interest rates.  This reflects that most dwelling purchases are made with borrowed money.

It is obvious that the rapid escalation of interest rates over the past year (to counter rising inflation) has reduced investor activity in housing, and has been the biggest factor in the large decline in housing approvals.  This has all happened because governments (across much of the world, not just in Australia) stimulated their economies by too much and for too long during Covid.  They now stubbornly refuse to tighten fiscal policy by reducing spending and/or raising taxes.  The result is that almost all the burden is being placed on interest rates, with housing being hit disproportionately.

The housing market will come under still greater pressure  for two reasons.  Firstly, some further increases in interest rates are widely expected.  Secondly, a lot of borrowers are still on low fixed rates, and more will be hit with big rises when their fixed terms come to an end over the next year or two.  Renters are at the pointy end of the market because, during a major shortage, they are the ones most likely to end up homeless.

It is not just interest rates that have been slugging (the mostly Mum and Dad) investors in rental housing.  While there are big incentives for owner occupied housing (e.g. grants and stamp duty concessions for first home buyers, exemption from capital gains, tax-free imputed rent), government impositions actively discourage people from becoming landlords and drive up private rents in the process.

Investors are generally slugged an extra 0.5 per cent p.a. interest over and above the rate charged to owner-occupier borrowers.  Such price discrimination is normally illegal under trade practices legislation, but is mandated under financial regulation in this country.  Interest rate differentials arguably should reflect the risk of default, so that in many cases the reverse should apply and investors might merit a discount instead of the current penalty loading.


Council rates are supposed to reflect the cost of providing services to property owners.  Instead of applying this principle, investors in rental housing are, however, systematically overcharged relative to owner occupiers.

In many jurisdictions small flats (mostly owned by investors) are charged almost the same rates as bigger units, despite having lower valuations and fewer occupants.  In turn, two bedroom units commonly pay disproportionate rates relative to larger houses.

It gets worse.  Many councils, especially in Queensland and WA, now apply a "differential rates policy".  In essence, they charge higher rates for a given property, if it is owned by an investor, despite such owner status having no bearing on the level of services provided.  Differential rates are simply a revenue grab, facilitated by the fact that many investors live interstate and thus can't vote in the relevant local elections (breaking the equity rule of no taxation without representation).

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Disclosure:  The author own residential rental property.

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About the Author

Brendan O’Reilly is a retired commonwealth public servant with a background in economics and accounting. He is currently pursuing private business interests.

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