Why Australia’s housing supply crunch will get worse before it gets better

21 AUG 2023 Promoted by James Chase 3 min read Investor Strategy

Our property markets are facing a combination of faltering supply and surging demand, which is likely to put upward pressure on rents and prices.

Let’s start by looking at new housing supply.

According to Housing Industry Association (HIA) analysis of the latest data from the Australian Bureau of Statistics (ABS), the number of loans issued for the purchase or construction of a new home in the May quarter was 31.1% lower than the same quarter the year before.

“There were only two other occasions in the last 20 years when these numbers were so low – the introduction of the GST and for a brief period during the outbreak of the GFC,” HIA chief economist Tim Reardon said.

“With the full impact of the rise in the cash rate still to flow through to these official figures, they are likely to remain suppressed for an extended period of time.”

Mr Reardon said many residential building projects were being cancelled, due to increased finance and construction costs.

“This lack of new work entering the pipeline means the number of projects that builders have sold but not yet commenced is shrinking rapidly, and far fewer new homes will be commencing construction by the end of the year,” he said.

Building approvals fall to 5.9% below long-term average

Speaking of pipelines – the latest ABS residential building approvals data also suggests our housing supply shortage is likely to increase.

The number of residential building approvals issued in May was 9.8% lower than the year before and 5.9% lower than the average over the past 15 years.

This suggests there will be a reduction in the number of new homebuilding projects that will start in the coming years.

Population growth hits 14-year high

Just as supply is slowing, demand is accelerating.

Australia’s population rose 1.9% in 2022, which was the highest growth rate since 2008, according to the most recent ABS data.

ABS head of demography Beidar Cho said the rapid population growth could largely be attributed to strong migration.

“Recovery of international student arrivals is driving net overseas migration to historic highs, while departures are lagging behind levels typically seen over the past decade,” she said.

“This pattern is expected to continue as international students return following the reopening of international borders, however there are fewer students ready to depart because very few arrived during the pandemic.”

Australia plans to admit 190,000 migrants in the 2023-24 financial year, following a record 195,000 in 2022-23.

How supply and demand affects rents and prices

When there’s a decrease in the number of new homes entering the rental and sales markets, that puts upward pressure on rents and prices.

When there’s an increase in the number of people in the rental and sales markets, that also puts upward pressure on rents and prices.

And when both those things happen at the same time, the upward pressure gets magnified.

Bear in mind, though, that this doesn’t happen instantaneously; these forces build over months and years. So the effects of this housing supply crunch and strong population growth will only be felt down the line.

The longer that supply remains constrained and demand remains elevated, the more likely this is to translate into strong rental and price growth in the future.

Given the outlook, this could be a great time to buy a NSW or Queensland investment property, with the help of a full-service buyer’s agency like James Chase. Book your free 30-minute consultation with George to discuss your options.