This means we are not about to see home prices recede any time soon and should expect prices to continue rising.
Reserve Bank chief economist Sarah Hunter.Supplied
Higher historic interest rates,and the affordability restraints that come with them,appear no match for the increased demand.
The budget’s near-term response to give additional is laudable but only a Band-Aid when structural solutions are needed.
The federal and state governments are fixated on building an additional 1.2 million homes over five years,but we are short on skilled workers capable of building them.
The desire for an increase in housing supply is paddling against the pandemic demographic trend that people want bigger houses to enable working from home.
So in this sense the chronic undersupply is a problem of our own making. The average size of households has declined. This point is rarely focused on,but significantly plays into the demand for housing.
Sure,last year’s increase in immigration is playing into increased demand,but it is not solely responsible for the relentless growth.
According to Reserve Bank chief economist Sarah Hunter:“Just under 27 million people live in Australia in about 11 million households. The average number of people living in each household has trended lower,from around 2.8 in the mid-1980s to around 2.5 of late.
“This may sound like a small change. But,if for some reason average household size rose back to 2.8,we would need 1.2 million fewer dwellings to house our current population – no small difference.”
Nine’s finance editor Chris Kohler breaks down the impact of the 2024 federal budget on interest rates.
She notes that despite the increases in demand and accompanying rise in rents and prices,it is curious that more housing supply isn’t being built.
“Our assessment is that,at a high level,the last couple of years has seen a perfect storm of constraints on activity,” Hunter says.
The bottom line is that the cost to build – be it from higher material costs or higher labour costs – doesn’t stack up for developers.
Hunter says that demand pressure,and so upward pressure on rents and prices,will remain until new supply comes online. She says the Reserve Bank expects this response to take some time to materialise,given the current level of new dwelling approvals and information from liaison with industry that many projects are still not viable. In the meantime,it is expected that residential construction will remain relatively subdued.
In recent years the costs of building materials and labour have risen sharply. Pandemic-related supply chain disruptions and competition for resources from other types of construction have pushed up prices by nearly 40 per cent since late 2019.
The sector having navigated the temporary disruption created by the pandemic,dwelling approvals per capita are sitting at decade lows. In other words,some market participants have delayed projects or decided not to begin because of the relatively high cost of building when compared with the project’s returns.
The government alone cannot solve this imbalance in supply and demand. The pipeline of approved projects is large and there is a bulge of new projects started but not completed.
Direct costs of building materials and labour make up a significant portion of home construction costs. In recent years these have risen sharply,and Hunter says they are not expected to fall back significantly.
High interest rates are another cost taken into account by property developers.
Rates should begin to come down over the next 12 months,but they are only part of the equation. Housing supply will ultimately improve. But it will be a slow grind.
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