This week we're talking about the new housing market across Australia and especially the interplay between supply and demand.
Four charts and one table accompanies this post.
Barriers and costs
Now if you polled most developers - as NAB, at bank - does each quarter, you'll find now that a large proportion of them, close to 50% say that it is construction costs and lack of labour availability that is stopping a new project.
Interest rates and tight credit only make up about 20% of the reason why some of their projects aren't proceeding.
So, it's largely to do with construction costs and the lack of qualified labour that is stopping new housing starts and both these components have been increasing over the last 12 months in terms of influence.
It costs $550,000 to build a standard four bedroom detached house in suburbia (even more to deliver a two bedroom apartment in an inner city location) and building price points have nearly doubled over the last decade.
Now when it comes to the rate of building cost increases, they're still going up by 6.7% per annum. They did peak at 18% increase during 2022-2023 alone.
When taking more historic view, the previous ten year average was a 6.1% annual increase in terms of building costs. Now, if we take a 30-year outlook, that increases ease a bit to 4.5% per annum. And if we remove the COVID increase surge in building cost prices, you'll find that that 30-year annual increase is 3.8% per annum.
I believe that looking forward, it's likely that we're going to see somewhere between a 3-4% annual increase in the future.
This doesn’t help much in terms of helping housing affordability, particularly if we continue building houses like we've always built them.
Demand v supply
Another factor that is worth considering when you're looking at the new housing market, of course, is the supply and demand.
Over the last decade has been the need to build something like 187,000 new dwellings per annum again across the country.
Now completions - not the housing approvals - have been less than that. They've been something like 172,000 per annum.
Our last chart – below - shows the interplay between supply and demand on a moving annual basis over the last 20 years.
And it shows that between 2005 and 2014 the Australian housing market was undersupplied. It was then in equilibrium between 2015 and 2019 and that's when not much price growth happened. Rents didn't move much either. Everything was hunky-dory so to speak.
We then saw an overbuild during the COVID period. That's because we had very little population growth, but we had the HomeBuilder incentive coming through and developers/builders were building homes.
Sadly, most of those developers and builders were working on fixed price building contracts and due to the surge in inflation it's has become very difficult (impossible really) for them to make profit.
And that's why you've seen a rise in the number of builder and developer bankruptcies in recent years.
And finally, since COVID we've seen the population surge, we've seen an undersupply of new dwellings.
I think the current level of new housing undersupply is the worse we have seen – well at least since I've been doing this stuff (and that's 30-odd years) and that's why housing prices keep on rising, and so do rents.
Looking forward
It's very difficult to supply new housing rental stock in Australia, not only due of the high level of demand (population growth and demographic change) and of course the high and rising construction costs, but because of our new home buyer profile.
Some 40% of new home buyers are second and subsequent owner residents and many of those are baby boomers. And most boomers aren't taking out a mortgage and this is another reason why house prices have risen despite the lift in interest rates. The size of this market has also increased in recent years.
First-time owner resident buyers make up about 23% of the new housing buying market and in contrast to baby boomers they're dropping as the percentage of the new market.
Investors overall make up about 30% of the new housing market – that includes second and subsequent investors and first time buyer investors.
Interestingly, 12% of that, of investors are first time investors. Many of them are renting, living with mum and dad and buying an investment property.
And the combined 30% of investor activity is equivalent to the proportion of people who are renting. And as a result, this limited level of investor interest in home housing buying is making it difficult to get ahead of increasing supply.
If say 40% of the new homes were being bought be investors, then we could get ahead of the curve so to speak and start supplying more new dwellings to the rental market.
More needs to be done in this space. APRA should loosen their buffers for new investment loans for new builds. Lower taxes and charges would help too.
Foreign buyers, last point, makes up about 9% of the new housing buyer’s market.
And overseas buyer interest has increased quite a bit over the past three years, and we will cover this topic in a Matusik Missive soon.
Get more!
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This 20 minute video holds 33 slides and is free to paid Missive subscribers.
This quarter’s video covers:
Current state of play
Population growth
Reasons behind price growth
Interest rates
Outlook
All charts and tables hold the latest data sets.
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