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Hey Australia we need to talk… we’ve got a supply problem

Australia’s housing shortage is well underway

If we listen to all of the doom and gloom in the media, it would seem that property values are about to plunge. Yet, this simply isn’t likely. Why? Because we actually have a fast developing undersupply problem. 

When there is more housing supply and less demand, property prices tend to drop, however, when housing demand exceeds supply, property prices typically increase. Throughout COVID-19, we saw the latter occur, which made property prices shoot up. Recently we’ve seen property prices stabilise (and in some markets reduce) – as a result of housing affordability pressures, interest rate rises and other factors – making it seem as though supply will exceed demand.

The reality is we’re actually heading towards a “housing supply crunch.” Although this may not be felt immediately, it will be felt within the next few years. By 2024-2025, it’s expected that net overseas migration will fully recover to levels of about 235,000 per year. Based on these figures as well as new building approvals and completions, it’s estimated that we’ll have a dwelling shortage of approximately 163,400 by 2032.

So, what’s causing this housing supply issue? Here are some of the factors to consider.

Construction and council delays during COVID-19 have significantly slowed supply

The amount of property supply that gains approval is completely different from the property that is actually being delivered. This can be a result of many factors, however, most recently this has mainly been due to labour and supply chain issues during COVID-19, significantly driving up the cost of construction and making new developments unviable.

In a challenging labour market, it makes sense that builders and developers also face challenges when attempting to build and complete their projects due to a worldwide labour shortage. The availability of materials like steel and timber also reduced significantly during COVID-19, creating further delays. When it comes to getting projects approved, councils have also been moving slowly as they faced their own labour challenges and internal issues.

As an example of reduced housing supply, recent figures provided by the NSW Department of Planning and Environment’s (DPE) reveal worrying trends from July 2021 to June 2022 for housing activity and supply. There have been 24,641 completions (28.7% below the previous 5 years average) and 36,205 approvals (14.4% below the previous 5 years average). The NSW DPE also predicts 151,000 new dwellings are likely to be completed under a predicted growth scenario in the next 5 years, which is 16% below the previous 5 years completions.

Migration is beginning to kick back to normal levels

International migration was obviously paused during the pandemic, but with borders now again open those numbers are expected to return to (or exceed) traditional levels. The Federal Government is expecting a minimum of 1.15m people to migrate to Australia within the next six years, however many economists expect the true international migration figure to be much higher as we look to combat a severe labour shortage. Historically, 88% of overseas migrants move to Sydney, Brisbane and Melbourne, increasing demand in those markets significantly. This puts even more pressure on those rental markets, which are already under severe pressure due to a lack of new housing supply. 

With international migration tipped to exceed pre COVID-19 levels, it seems highly feasible that demand will outstrip housing supply for the foreseeable future. The below table shows the tightening of rental markets around the country, a problem that is likely to get worse before it improves:

Capital CityJanuary 2019October 2022
Sydney3.3%1.3%
Melbourne2.0%1.5%
Canberra1.0%1.1%
Brisbane2.8%0.8%
Perth3.2%0.4%
Adelaide1.2%0.4%
Darwin4.3%1.0%
Hobart0.5%0.5%
National2.4%1.0%

When will supply return to the property markets around the country?

Unlike buyers’ confidence, property supply cannot simply be turned on and off in a matter of months. With property markets around the country softening in 2022, it will take several years for supply to again start impacting the property markets as many new projects have either been delayed or mothballed as the numbers for construction simply do not stack.  

A more likely scenario is that the lack of supply will lead to the next house price boom in the next 1-2 years, once interest rates stabilise and the impacts of wage inflation begin to take hold resulting in increased borrowing capacities for purchasers. 

With rental yields on the rise, investors are likely to return chasing cash flow neutral or positive investments, further impacting supply issues for owner occupiers.  The savvy investors have already begun purchasing owner occupier quality properties as they currently face reduced competition in the short term from local buyers, something that wasn’t the case during the peak COVID-19 buying frenzy.

As supply is likely to be an ongoing concern for years to come, the fundamentals for increases in property values and rental incomes look strong over the coming years. As always, the Binnari team is happy to share further insights/research with our investors and partners, so please feel free to reach out if you have any further questions.