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Wednesday, January 10, 2024

How tens of thousands of ‘missing’ homes could push Australia’s property prices even higher

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It’s clear property prices in Australia will continue to rise, for now.

That’s a conclusion based on logic and mathematics, and common sense.

The bottom line is this: we are not building enough homes to meet the growing demand for housing. That will put upward pressure on property prices this year – despite soaring inflation and rising interest rates.

Nothing, however, is indestructible. There will be a point at which interest rates become too high to sustain a rising property market.

Much depends on how long inflation stays uncomfortably high for the Reserve Bank.

What’s driving demand?

There are two key sources of increased demand for housing or property: a growing population, and rising incomes.

The main factor in Australia’s recent population surge is a sudden and surprise increase in migration, which at least accounts for the rise in population.

The Reserve Bank, for example, stated publicly it was surprised by the immigration announcement made earlier this year, for net migration to increase by hundreds of thousands of people in 2023.

As one leading economist said this week, increased migration boosts demand more broadly in the economy.

“The subsequent effect of the re-opened border and strong inward migration has driven a further increase in aggregate demand but also boosts labour supply,” HSBC chief economist Paul Bloxham said.

But it also, clearly, boosts housing demand – people who arrive need a roof over their head.

“A clear impact is on the housing market,” Bloxham said.

“Australia’s re-opened border and strong inward migration have driven a housing shortage, with rents rising sharply, adding to inflation.”

Many of the new migrants are students, but property analyst and SQM Research managing director Louis Christopher says he believes a significant number of migrants could be competitive bidders at property auctions.

“The data on wealth of skilled migrant demand is sketchy” – it comes from the Foreign Investment Review Board – “and not very clear on net wealth of such migrants,” Christopher told The Drum.

“Consensus is most skilled up migrants are also cashed up and I do believe the surge in overseas long-term arrivals has contributed to the rise in dwelling prices for the first half of this year.”

Australia needs more housing

Another force pushing up property prices is the lack of supply.

The federal government’s Housing Australia Future Fund was designed to provide an investment vehicle that would finance the construction of 30,000 new social and affordable dwellings over the next five years.

This week, the housing bill was stalled in the Senate and is now unable to be re-introduced into parliament until October.

Instead, the government will give all the states and territories combined a total of $2 billion to build more homes.

Exactly how many properties will be built as a result is unclear, but academics at the University of New South Wales describe the number as “tiny”.

“The $2 billion investment should probably generate somewhere between 4,000 and 5,000 new homes,” says UNSW’s City Futures Research Centre associate director, Hal Pawson.

“The number will be larger if state/territory governments choose to invest via community housing providers, since the latter can (a) benefit from GST concessions, meaning they can stretch the funding further, and (b) also stretch the public funding by supplementing with private debt to be repaid over time.”

Either way, though, Pawson says “the scale of this is pretty tiny when set against the 437,000 households currently experiencing unmet need for social housing” – that is, homeless people plus private tenants in rental stress.

60,000 missing dwellings

Meanwhile, JPMorgan research has uncovered tens of thousands of so-called “missing homes”.

These are homes that were approved by authorities to commence construction, and should have been completed by now, but have not.

“The number of ‘missing’ dwellings now totals between 50,000-60,000, a non-trivial shortage given tightness in the residential rental market,” analyst Tom Kennedy wrote.

The delay may be related to labour shortages, materials shortages, inclement weather or building firms going bust.

In simple terms, JPMorgan can look at how many homes were approved to begin construction, and how many have now been completed.

That “completed” number is behind where it should be, suggesting a sizeable backlog of houses yet to finish on time.

“Our expectation had been for this backlog to gradually decline from [the second half of 2022] as demand moderates and sector-specific disruptions become less intense.

“That hasn’t yet occurred, with residential investment contracting in the March quarter and business surveys indicating construction firms continue to push up against capacity constraints.”

Stepping back a bit, Louis Christopher says Australia is well behind where it needs to be in terms of total housing construction, having completed about 180,000 dwellings last year.

“This year SQM predicts that number will fall to about 165,000,” Christopher says. “The fall is due to the increase in cancellations for which we are in agreement with JP [Morgan].”

At one point, he adds, 240,000 dwellings were in the pipeline for this year.

Based on a population expansion of approximately 500,000 people for 2023, Christopher says Australia needs at least 190,000-200,000 dwellings completed.

If you’re getting lost in the big numbers, take heart: this is the key point with regard to housing supply.

At present, the pace of housing construction is not keeping up with increase in the population, due to a surge of migration.

But add to this a backlog of work already in the construction pipeline, and you have a housing crisis in which ever-rising property and rental prices are a feature.

What does all this mean for the property market?

For now, it means there’s likely to be ongoing upwards pressure on prices.

There is a “risk”, says ANZ senior economist Adelaide Timbrell, that prices are above the December 2022 level in December 2023.

“Our forecasts expect them to be broadly the same, and more rate hikes are likely to put downward pressure on housing prices but strong population growth and recent trends in demand for housing pose upside risks to these forecasts,” Timbrell says.

The CBA’s head of Australian economics, Gareth Aird, is more confident about property prices rising in 2023 and into 2024.

Aird sees national property prices (annual change) lifting 3 per cent in 2023, and 5 per cent in 2024.

But SQM’s Louis Christopher sees this upwards momentum as a short-term trend, or what he calls a “false dawn”.

His view is that property prices will increase between 0 per cent and 4 per cent this year, then decline.

SQM has no “formal” forecast for the RBA’s cash rate, but Christopher predicts that if it were to hit 5 per cent, the probability of a “hard landing” in the housing market would rise well above 70 per cent.

It all comes back to inflation. If it remains elevated, Reserve Bank interest rate increases will eventually pull property prices lower.

Right now, based on the evidence, it seems a chronic lack of supply and increased demand for housing are supporting property prices and could lead to a further lift in the market.

Logically, you can see a scenario emerging where the forces that would traditionally pull down a housing market in this economic climate – rising unemployment – are overcome by a severe lack of housing, and a growing population.

In terms of easing the housing crisis, it’s definitely a dilemma.

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