Would you believe our ever-rising house prices are actually a sign there's something deeply wrong with our housing market? And did you know our housing situation is worse compared to other wealthy countries? It’s a surprising truth that Treasury has revealed in their latest annual report.
Understanding the Crisis
In a healthy economy, industries can quickly respond to increased demand by boosting supply. Sure, building new homes takes longer than producing more ice creams or haircuts, but even so, our housing industry has been sluggish. Our growing population, fueled by high levels of immigration, means we need more homes than ever before, but the supply isn’t keeping up.
According to data from the Organisation for Economic Co-operation and Development (OECD), the number of dwellings per 1,000 people in Australia only rose from 403 to 420 between 2011 and 2022. This is slow compared to other countries. In 2011, our housing supply was 92% of the OECD average. By 2022, it had dropped to 90%, lagging behind countries like Canada, the United States, and England.
Our peak of new private dwelling completions was over 200,000 a year in 2018-19 but has since fallen to around 160,000 a year. This leaves us with a significant shortage of properties available to buy or rent. Nationwide, the number of homes for sale has fallen since 2015, and the number available for rent has been dropping since early 2020.
The Rental Market Squeeze
Treasury suggests the rental market is balanced when the vacancy rate is about 3%, meaning renters can easily find places and landlords can easily find tenants. In cities like Sydney and Melbourne, the vacancy rate is now around 0.5%. Ouch.
As demand outstrips supply, prices inevitably rise. The skyrocketing costs of newly built homes and renting have significantly contributed to the broader cost-of-living crisis.
Why Is Housing Supply So Slow?
Treasury says the reasons are complex, involving all stages of the housing construction process and affecting all levels of government and industry. One way to improve the market's response to demand is by accelerating construction. However, over the past decade, completion times for apartments, townhouses, and detached houses have actually worsened by 39%, 34%, and 42% respectively.
To meet our housing needs, we need to speed up construction. Federal government estimates suggest that unless completion times improve, we’ll still have a backlog of about 39,000 dwellings in six years.
Research shows that faster home construction can help lower house prices. For instance, OECD countries that built more housing over 15 years saw lower real growth in house prices. Adding an extra 50,000 homes a year for a decade could reduce house prices by up to 20%.
What’s Slowing Down Construction?
Planning and zoning restrictions can limit how quickly land becomes available. Local councils often have lengthy delays in approving development applications. These bureaucratic processes slow down construction, making it harder to meet demand.
Approval times for development applications vary by state, with Victoria and NSW having the longest waiting times—144 and 114 days, respectively.
Additionally, global supply constraints and price shocks on imported building materials due to the pandemic have driven up construction costs. Although prices aren’t rising as quickly now, they haven’t fallen back either.
Labor shortages have also increased the costs of newly built homes and slowed construction. The industry blames these shortages on the drop in skilled migration during the pandemic, but it’s possible the deeper issue is a failure to train enough apprentices.
Government Intervention and Investor Opportunities
What’s the Albanese government doing about this mess? They’re taking action with a substantial investment—$32 billion, including $6 billion in this month’s budget—to "address historical underinvestment in the housing system" and build 1.2 million new, well-located homes.
For property investors, this crisis presents unique opportunities. The ongoing supply-demand imbalance is driving property values higher, making it a potentially lucrative time to invest. Despite the challenges, the demand for housing remains robust, and strategic investments now could yield significant returns.
Curious about how you can capitalize on these trends? Talk to Oli today to explore how you can navigate the current market and make informed investment decisions.
Source: Ross Gittins
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