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How will falling property supply impact property prices

Property price movements are a function of supply and demand. In high demand low supply environments, we see prices rise and vice versa.

When assessing the potential of a property market, it’s important to consider both sides. When assessing demand, we focus on population growth, job growth and market sentiment. When assessing supply, we focus on vacancy rates, new development approvals and the number of sales listings.

How has property demand changed during COVID-19?

The limitations and restrictions implemented due to COVID-19 has made transacting property more difficult. The temporary ban on property auctions and open home inspections meant they were traded for private appointments and virtual tours. This coupled with the COVID uncertainties has reduced both market confidence and property listing rates. However, there are still many genuine buyers in the market who are purchasing. McGrath agent Nicholas Wise recently wrote to ‘there was just a single new apartment listing in Coogee this week but plenty of motivated buyers still looking, including underbidders from auctions earlier this year’. He continued by saying, ‘transaction activity is down but not the prices.’

We’ve witnessed this trend in other property markets throughout the country, as the reduction in buyers is countered with the limited supply of quality properties.

The real numbers behind falling property supply

From a supply perspective, we can think back to before COVID-19 took a hold, data had already suggested that new property supply was slowing. This slow-down was a result of restrictions on foreign investment, changes to APRA’s lending policies, rising construction costs and the uncertainty around the Federal Election with regard to negative gearing changes. In October 2019, ‘The Business Insider’ reported that the, ‘RBA is anticipating a housing shortage and another crazy price boom in markets that really don’t need it’. They reported that since September 2018, ‘residential construction activity has declined by 9% and building approvals were around 40% lower than their peak in late 2017.’

With COVID-19 now causing reduced sales volumes, many developers are putting new project launches on hold which will further reduce supply. The ‘Urban Developer’ recently published an article titled, ‘Property Developers Reluctant to Push Ahead With New Projects’ it discussed the state of the development market and how uncertainties in the market were going to result in slowing property supply. The article specifically focussed on the number of cranes as a sign of development, reporting that the number of residential cranes had fallen from 521 to 484 in the last 2 quarters.

Below, we look at the number of dwelling approvals in QLD, NSW and VIC.

Evidently, all three States have seen their dwelling approval numbers fall from their peaks. Queensland last year recorded 40% reduction from its 2015 peak. Victoria experienced an 18% reduction from its 2017 peak and New South Wales has seen a 32% reduction.

The Australian Financial Review recently reported that the number of new dwelling approvals were at lower levels than recorded in the 1960s.

It’s important to note, that in environments like these, an approval does not necessarily mean the project will commence. Factors including, construction costs, market confidence, sales demand, foreign investment and lending requirements will all impact the feasibility of many of these projects. In fact, we’re likely to see the number of actual dwellings delivered to fall considerably.

Have we seen the last of overseas migration?

Over the years, fluctuations in supply levels have generally been met with consistent, or rising migration levels resulting in consistent property price growth. Given the nature of the COVID-19 pandemic, population growth will slow due to a temporary halt on migration however, the retraction in property supply will assist in the markets holding their value and when we do start to see overseas population growth return, there’s no doubt our property markets will see a rise in demand.

In comparison to many other countries, Australia has been applauded for the relatively few cases of COVID19 and our ability to bounce back quickly. Our desirability as viewed by migrants is only likely to increase, so can we expect to see strong population growth once international travel restrictions are lifted.

What will this mean for property prices?

As new property supply reduces, so does the availability of high-quality ‘in-demand’ properties in sought after locations. As we enter this limited supply phase, we will be doing so with record low interest rates of around 2-3% on offer. Additionally, State and Federal governments have been discussing ways to drive new buyer activity to kick start the economy, so we can expect to see incentives introduced in the coming months. Only recently, NSW’s treasurer proposed getting rid of stamp duty on property purchasers for new property transactions, if legislated, this initiative would obviously have a positive flow on effect to new buyer activity and create further demand in the market.

We are also likely to see the desirability of property increase for potential investors, as many of those financially unimpacted during isolation will have money to spend and need to find a place to invest. With interest rates and bond yields at record lows, volatility in the share markets, property becomes an attractive proposition for investors looking to generate a return. A supply shortage in key owner occupier markets coupled with sustained or increased demand, will result in continual upward pressure on prices.

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