Revisiting housing demand/supply

As well as interest rates, an important factor affecting house prices is the level of demand versus supply. If lots of houses/apartments are being built without sufficient population growth, that will tend to put downward pressure on prices and vice versa.

Amid travel restrictions, net overseas migration has plummeted and therefore so too has Australia’s population growth. This looks to have been further augmented by slowing births as women delay pregnancy amid the current economic/political uncertainty. That says physical demand for housing has hit the brakes. Population growth over the year ending Dec-2020 was 136,000 compared to 387,000 a year prior. A massive slowdown.

On the other end of the spectrum, new supply of housing has continued on pretty healthily. In fact, the HomeBuilder stimulus has seen new building activity for detached housing increase. Approvals and commencements have increased, which means completions will soon follow. It is completed dwellings that effectively add to housing supply, as they can be lived in.

So effectively, new demand for housing has slowed while supply has remained very healthy, with completions running at around 200,000 per year. In 2020, completions were around 182,000 compared to 136,000 population growth! That’s more than one dwelling for every person!

Ratio of annual building commencements/completions to population growth

In this case, we can ask how can there be a rental market squeeze, of which the anecdotal data is supportive of! SQM Research says that at the national level, rents for 3-bedroom houses have increased by 11.8% annually and 7.5% for 2 bedroom units! Meanwhile vacancy rates have been trending lower to 1.7%. So the evidence on the ground is that despite our low population growth, the rental market is on fire.

What gives? One argument is long-term rental stock is being converted to AirBnBs to meet hot local tourism demand (amid a lack of overseas travel), effectively taking that stock out of the rental market (and to the tourism market). Another argument is that household preferences have shifted. Amid lockdowns and WFH, people are less likely to want to be in a sharehouse as opposed to their own place. This would effectively increase rental demand. Yet another reason, similar to the second, could be an increased rate of romantic separations (again supported anecdotally) increasing demand.

All-in-all, the proof is in the pudding, which is that the property market is red hot both in terms of prices and rents. However, the longer term outlook may be more sanguine. A lot of the factors I just referred to could be short-term in nature. After they settle down, strong building activity relative to population growth may take precedence. That would be expected to put downward pressure on rents and prices. Add in the prospect of higher mortgage rates and you could make a case for the next correction being in the works.

Revisiting housing demand/supply

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