February 5, 2023 by Dymphna

Exposed: the one factor driving the 30-year boom in property

Property has enjoyed an epic run in recent decades. It will continue.

This will be the year that Australia finally unwinds its epic housing shortage.

Lol. No it won’t.

The shortage is only getting worse.

People look at the housing market and wonder why it’s outperformed for like 20-odd years. It’s simple economics. Supply and demand.

We just don’t build enough houses.

We haven’t for years. We haven’t kept pace with increases in population at all.

And in the early days of Covid, there was a lift in building approvals with government support programs and record low interest rates.

But that surge in demand ran straight into supply chain bottle-necks, and right now, supply – as measured by the number of new home sales – is falling.

The Housing Industry Association – the HIA – reckon that sales of new homes fell by 4.6% in December, leaving sales in the final quarter of 2022 a whopping 42.0% lower than at the same time in 2021.

That’s massive.

There’s a few problems here.

The first is that rising interest rates are causing many buyers to rethink their options. The HIA reckons that the RBA’s super aggressive rate-hikes have “seen many recent buyers of new homes unable to finance their new project.”

Not only that, the HIA also reckon that “one in five recent new home buyers have had to cancel their new home building contract as their access to finance was reduced by the rise in the cash rate”.

20% of new home contracts are falling over. That’s pretty massive.

Hard to see us generating enough supply to undo the housing crisis with that going on.

The other thing going on here is that a surge in construction costs has delayed projects and seen many builders go bankrupt.

You can see that in the data on the pipeline of new housing supply. According to the ABS, the number of homes under construction hit a record high in the September quarter of 2022:

That’s not because we’re starting more new homes – as you can see the number of new home sales is falling.

It’s simply because we’re taking longer to bring homes to market.

For now, this back-log is making the construction industry numbers look good. But it won’t last. As the HIA say:

“Once this pipeline of new home construction work is exhausted, the full impact of the RBA’s rate increases will become apparent. This is expected to occur in the second half of 2023″.

That is, in the second half of 2023 we’ll wake up to the fact that we’re not building anywhere near enough homes. Not even close.

Australia has had a chronic housing shortage for years. For years and years.

This has been one of the key factors driving capital prices gains the whole time I’ve been active in the market.

And it’s just not unwinding any time soon.