Households tend to trade up and quit share housing when the market is flooded with excess supply that causes rents to fall.
A study suggests that when space for rent becomes cheaper, households respond by spreading out, quickly cancelling out the effect of extra housing supply on rental costs.
The research, by the independent Melbourne-based research institute Prosper, challenges the default position of policymakers to boost supply as the answer to Australia's worsening rental crisis.
The study draws on the "natural experiment" of Melbourne during the pandemic when it experienced a rare contraction in population as overseas students returned home and people moved interstate or regionally to dodge tough lockdown restrictions.
Despite the shrinking population, new home construction continued more or less unchanged, which led to an excess supply of 100,000, or enough to house 260,000 people.
Prosper director of research and policy Tim Helm said this "virtual building boom" did shave 12 per cent off average rents for about 12 months but the low rents did not last.
"Within a year, rents were back to their pre-pandemic levels despite there being fewer people and more houses."
Dr Helm said there were a few reasons for this, including demand for more space to work from home, but he said households also responded to cheaper rent by trading up or moving out of sharehouses.
"When housing space became cheaper, households unsurprisingly consumed more of it, and household sizes fell," he said.
Plus, almost 35,000 more dwellings than usual sat vacant or under-utilised that year.
"If an excess supply shock on this scale can do so little for prices, even accounting for changing preferences, how can we hope to deal with the pointy end of housing stress through additional market supply?" he said.
"Focusing on supply seems like a 'trickle down' approach to helping those in need."
Dr Helm said the experiment challenged the notion of flooding the market to ease affordability pressures by fast-tracking planning via tax breaks, upzoning, and subsidies.
The researchers also suggested it was more effective to ease housing affordability pressures via income supplements than by boosting supply.
Prosper Australia is an independent research institute that advocates for a tax system based on land rather than income.
Boosting supply is one facet of the federal government's housing agenda, with the Commonwealth joining forces with states to target one million new homes by 2029.
But the federal government also wants to fund more social and affordable homes, which will be rented at below-market rates, via its $10 billion housing future fund.
The fund has come up against resistance in the Senate as The Greens push for more ambition from the government that's more proportionate to the scale of the housing crisis.
Treasurer Jim Chalmers said the government had a broad and ambitious agenda on housing and the fund was only part of it.
"It's time to win the political games and the ambit claims in the Senate," he told reporters on Monday.
"If you support social and affordable housing, you should vote for it."
