April 22, 2024 by Dymphna

Yikes! This will put even more pressure on house prices

This tilt in the market will put even more pressure on prices.

We’re creating exactly the wrong kind of demand in the housing market.

It’s going to make things worse, not better.

Last week we saw that new home loan commitments were up 13.3 per cent year on year in February. That’s pretty healthy.

Break it down by investors and owner-occupiers and it’s all pretty standard. Investors were up 1.2% in the month and 22% in the year, while owner-occupiers were up 4.8% in the month and 21% in the year.

With investors and owner-occupiers moving in lock-step, that seems like a pretty balanced market.

But dig into it a little further, and there’s a problem.

The value of loan commitments for new housing construction fell 2.1 per cent in February after a decline of the same size in January. At $1.6 billion, the monthly total is now the weakest since September.

That is, while demand for existing homes is pushing higher, demand for new builds, or newly built dwellings is going backwards.

This means that we’re not going to be building the homes we need to take the heat out of the housing crisis.

The Housing Industry Association note that this is the weakest period of new construction in 20 years:

“This is a deeper and more sustained downturn in lending for home building than any other period observed in the past 20 years,” HIA chief economist Tim Reardon said.

“The rise in the cash rate is the primary cause of this poor result in new home lending. Higher interest rates are compounding the impact of the rise in the cost of construction caused by elevated land, labour and material prices. This is further exacerbated by macroprudential rules that remain overly restrictive.”

HIA Senior Economist Tom Devitt was also glum in his assessment of the data.

“The prospect of a pick-up in home building activity in 2024 is not likely given the low volume of new homes sales in the first three months of 2024”, Devitt said.

“Concerningly, sales in the first three months of this year remain 41.3% below the same quarter in 2021, 18.2% below the same quarter in 2020, and 18.9% below the same quarter in 2019″.

Yep. When you put it like that, they’re some pretty ugly numbers.

But think about what this dynamic means for a second.

The demand for existing homes is lifting, as demand for new homes is falling.

Not only does this mean that the housing shortage is going to get worse, it also means that competition for existing homes is going to heat up.

As buyers shun new builds in favour of existing homes, the price of existing homes gets bid up, sending prices even higher.

Expect some pretty intense price pressure on existing housing as this dynamic continues.