August 19, 2020 by Dymphna

Post-Covid boom takes shape

The next five years of the property market is already in the data.

The groundwork on the post-Covid boom is already being laid.

Most things move in cycles and the property market is no exception.

I mean, the tail end of winter is a good time to watch this in action. The buds of spring are already coming into being.

They won’t be in full bloom for another month or two, but in the depths of winter, the groundwork for spring is already being laid.

Spring isn’t just some switch that gets flicked and suddenly flowers are popping out everywhere. Flowers have been brewing in the genetic code of plants since March.

So without getting too mystical about it, this is the nature of all things. The Way of the Property Market.

And its not just some baseless assertion either – some profound insight into the essence of the market.

It’s there in the data already.

What data?

This data:

This chart is the Housing Industry Association’s (HIA’s) forecast for new dwelling construction.

On current trends, they see dwelling commencements slumping to a 13-year low of 133,010 by June 2022.

That’s down a whopping 58% from the June 2018 peak:

“Due to this slower rate of population growth, we now expect starts to be around 172,000 by 2030, compared with 190,000 starts in our previous long term forecasts. For comparison, in 2016, new home starts peaked at 234,000. This record number appears likely to be unparrelled for more than a decade”…

So what are we saying here?

Supply is falling.

It’s as simple as that. Supply is falling.

So remember Economics 101. Prices are set by supply and demand.

And, all other things being equal, falling supply means rising prices.

Now it is true that demand is falling now too, particularly through reduced immigration.

But these things are going to be temporary. Immigration in particular will bounce back very quickly when Covid passes.

And so falling supply is laying the ground work for the post-Covid boom.

Don’t take my word for it. Here’s Chris Freeman writing in Domain:

Development approvals for new housing this year sank to their lowest level in close to a decade, with building levels nearly one fifth long-term trend in some areas, analysis of ABS data showed…

Consultancy group AreaSearch’s director and former head of research at Charter Hall Group Chris Freeman said a similar situation laid the groundwork for a 2014 boom in prices.

Underbuilding in the years after the global financial crisis in 2009, coupled with a sudden drop in interest rates, created a supply and demand imbalance that sent prices skyrocketing, he said.

With rates expected to stay at record lows for years to come, the next housing shortage could have a pronounced effect on the market once confidence returns, Mr Freeman added.

“One key factor for Sydney now is approvals relative to the population base, which at 0.62 approvals per 100 people in population is the lowest in recent history,” he said.

“In a normal market, Australia as a whole adds about one dwelling approval per 100 people on average each year.”

A critical indicator of the looming undersupply was that Sydney was building fewer homes relative to the population than in 2013, just before the market went into a period of strong growth, he said.

I think this is right. Once the temporary demand shock of Covid passes, we’ll find ourselves with a more permanent shock to supply.

Demand will bounce back, and supply will lag way behind.

And the post-Covid boom will blossom.

This is the Way of the Property Market.