Does new housing provided by the private market increase the availability of affordable housing? Or should government policy subsidise housing and directly target low-income households to increase affordability? The answer depends on how quickly housing becomes more affordable as it ages. This dynamic is often called `filtering’. This note examines the ability of filtering to increase affordability in the Australian rental market.

Findings

• On average, a rental property becomes 3.6% cheaper in inflation-adjusted terms as it ages 10 years.
• Affordability depends on both rents and incomes, and after controlling for changes in the income distribution, the rental also becomes affordable to 3.9% more of the population over this time.
• Rental filtering is stronger in areas with more new housing being built – rents decline up to 9% with 10 years of age, and
  it is weaker, and sometimes reversed, for properties that are cheapest to rent.
• Building market-rate housing is complementary, rather than competitive, to policies that directly provide affordable housing.
• Market-rate supply eases the burden of these targeted policies, by generating affordability through filtering at all but the lowest parts of the rental price distribution.
• New construction tends to support affordability.
• Affordability policies targeted at low-income households, such as social housing, are likely necessary for Australia’s rental
  market.