Housing construction is booming. Could a rush of new supply suck the heat out of property prices. Perhaps, but it looks like this construction boom is going to be very short lived.
One of the things that happens when the property market is booming, like it is now, is that people start building more houses.
The logic is easy enough to understand. Houses cost more, so building and selling houses delivers a better return. Builders and developers have an added incentive to bring new supply to the market.
The other thing that happens is that banks start loosening their lines of credit to builders and developers. Now that the boom is well and truly underway, and every analyst and their shih tzu is locking in rising prices as far as the eye can see, property becomes a much safer bet.
Following the GFC, the banks went off property. It was difficult for developers to get the funding they needed to get their projects off the ground. But now that the boom is on, and prices are rising, credit is easier to come by.
And so rising prices, together with the expectation that prices will just keep rising, have created a construction boom.
And I mean BOOM! We’re currently on track to build more homes this year than in any year in the past 25!
That’s what this chart here shows:
Total dwelling construction has jumped to the highest level since 1994.
In part it’s been driven by the ongoing boom in apartment construction, which began back in 2009. But it’s not the only story. Detached houses have also started booming, with a big jump in the past couple of months in particular.
Builders are making hay while the sun shines.
But does this mean that boom in prices is over?
That’s what some folk are saying. They reckon that because supply is ramping up, that will bring a bit more balance back to the market, and this should take the edge off rising prices.
This is economics 101. If supply goes up, things become less scarce and easier to get a hold of. Bidding cools down and prices fall, or grow less quickly.
But in terms of Australian property, this is a massive over-simplification.
The first point is houses and apartments aren’t totally substitutable. So while apartment construction has spiked to the highest level on record, housing construction is still below it’s 2009 peak, and way off the record construction rates posted back in 2000.
So the ‘price’ effect of the current construction boom depends a lot on how willing people are to ditch their dreams of owning a detached home, and settle with an apartment.
That, in turn, probably depends on stage-of-life factors. Most apartments aren’t really suited to raising a family in.
And so while there may be increasing supply in total housing overall, it still looks like there’s a shortage in detached housing, and it still looks like that shortage is getting worse.
I imagine the price effect for this segment – detached housing – is probably going to be pretty muted.
The other point is that construction is booming now, but where will it be in a year’s time?
In their most recent Residential Land Report, the Housing Industry Association (HIA) reported that vacant lot prices had jumped to a record $205,248 on average in the March quarter. See chart:
But at the same time as prices are rising, sales are actually falling – sales are 5% lower than a year ago.
So you’ve got builders keen to build and make the most of the property boom. That’s pushing up land prices to new records. BUT, land sales are actually falling.
As much as they might want to, they’re going to struggle to find suitable land to build on. There’s already a rush on land, and that’s what’s driving prices to new records.
And that means these record construction rates can’t last. They’re going to have to come back down. And that’s going to push the market dynamic back towards a shortage and rapidly rising prices.
And the boom keeps rolling on.
The only thing that can change that is a new property policy mentality. The HIA is keen to point out how absurd this situation is, and lays the blame squarely at the feet of the usual suspects: inadequate land release, cumbersome planning approval processes, and excessive taxes and charges on development.
But I wouldn’t be holding my breath for a change in any of those policy settings.
My tip is that the boom in detached housing has, or is close to peaking. From here it will fall, and the shortage in the detached housing market will worsen.
At the same time, the ongoing boom in housing prices, together with a spike in the price of vacant land will push more development towards apartments. Perhaps that might take some of the edge off apartment prices…
But so long as there’s a shortage of detached housing, apartment living will have to soak up the excess, and that will keep upward pressure on apartment prices too.
So as good as the current construction boom might be for the economy, let’s not go patting ourselves on the back too soon. This construction boom will be short lived, and prices will keep on rising.