Property experts agree: we’re in trouble.
Property experts reckon the housing market is epically stuffed.
That’s the broad vibe.
Specifically, experts surveyed in the AFR’s quarterly property wrap say the current housing shortage is only going to get worse, and prices are only going to go up. It’s a ‘perfect storm’:
High interest rates and construction costs are choking off the supply of new housing, adding pressure to rents, squeezing first home buyers out of the market and putting the national target of 1.2 million new homes over five years out of reach, property experts say.
“With a record under-build relative to household formation, housing supply is critical in Australia,” Barrenjoey’s chief economist Jo Masters said.
“However, it is not easy to overcome a perfect storm and will require a number of catalysts. Building approvals have stabilised at low levels for houses but continue to trend lower for apartments. There has been some relief in access to inputs and labour, and in the prices of some early-stage inputs, but labour costs remain elevated and the regulatory burden high.”
There’s two separate things going on here.
The first is an explosion in construction costs post-covid, an explosion that could potentially get even worse if current disruptions to shipping routes get worse:
Disruption in the shipping industry threatens to inflate the cost of imported materials and new homes, with geopolitical crises in the Red Sea and Asia fuelling the worst freight delays since the pandemic.
High construction costs are being singled out amid a complex mix of factors that have pushed up the cost of building in most capital cities at a faster rate than house price growth, making it less economical to build new dwellings relative to buying an established home.
“The growth in costs has finally returned within normal margins. However, the price of construction is not falling and building or renovating remains almost 30 per cent more expensive now than pre-COVID after an extended period of escalating costs,” CoreLogic research director Tim Lawless said.
There are a tonne of projects across the country that just can’t get moving right now because the numbers don’t stack up.
You can see this in the number of dwellings under construction, which have ballooned well above normal ranges:
So that’s holding up current projects.
But the pipeline of future projects is drying up too. Dwelling approvals have tumbled:
Dwelling approvals data shows just how dramatically the flow of new homes has dwindled. The annual run rate of approvals is running at about 164,000, well short of the federal government’s ambitious target of building 240,000 dwellings annually over the next five years. Meanwhile, population growth of about 635,000 annually is running at near record highs.
“Right now, we are not seeing any indicators housing supply is about to rise,” said SQM Research founder Louis Christopher.
“SQM Research has forecast completions for FY25 coming at just 138,000 new dwellings. Perhaps a rate cut (when it comes) might be the catalyst.”
But approvals go hand in hand with pre-sales, and with costs rising and interest rates remaining high, pre-sales are grinding lower as well:
Ben Burston, chief economist at Knight Frank, agreed the failure to hit presale targets – as a result of lower investor demand leading to softer pricing for new product – had put a brake on new supply. Similarly, in the institutional build-to-rent sector, steep rises in construction and funding costs was not being sufficiently mitigated by higher achievable rents.
At this stage it looks like the restoration of high levels of housing construction will be a slow grind,” he said.
It’s a difficult state of affairs, but the maths is pretty simple right?
Lower pre-sales equals lower starts equals lower supply.
People are always surprised that I know what the market balance is going to be over the next five years. Like I’ve got a crystal ball or something.
But tomorrow’s shortage is being baked in today.
And prices will follow, as night follows day.
DB