Some things never go out of fashion – like Australia’s housing shortage.
Ok, what does the year hold for the Australian property market?
Now you can get tangled up analysing all sorts of factors, but at the end of the day, you’ve got to remember that it all comes down to supply and demand.
The supply and demand framework is simple but it’s incredibly powerful. It’s famous for a reason. It works. And if you can keep your thinking anchored in supply and demand, you can’t go too far wrong.
So let’s break it down.
First, let’s have a look at demand. We can think about housing demand as a function of the number of people in the country, and how much money they have.
On the first front, the Australian population continues to grow strongly. We have one of the highest population growth rates in the OECD. As the chart below shows, population growth remains well above it’s long-run average.
I’d like to tell you that’s because we’re having more babies, but it’s not. It’s largely due to our immigration program, which is also one of the largest in the OECD, relative to our population.
That means that housing demand is going to remain elevated, purely on a population basis.
But as I said, it’s also about how much money people have.
On that front, credit conditions continue to ease. APRA continues to walk-back the tight restrictions they introduced in 2016, and the banks themselves are shaking off the freeze that followed the Hayne Royal Commission.
We’ve also had a string on interest rate cuts, with another one likely in the first half of 2020.
With unemployment remaining low and wages steady, that means there’s been a decisive lift in how much money people have to spend on housing.
Put that together – strong population growth, and fat pockets – and housing demand will be strong – definitely relative to the last couple of years.
On the supply front, 2020 looks to be a challenging year.
Detached housing remains constrained by the availability of greenfield sites, and people are now talking about a ‘construction bust’ in the high-rise sector.
We did have a boom in high-rise apartment construction through the second half of the last decade, but in 2019 high-rise construction approvals started to tank. This was driven by a tighter credit environment and the exit of some big foreign developers.
What’s worse, the high-rise sector remains beleaguered with quality control issues. The number of cracked buildings with structural faults points to something systematic, and the prevalence of flammable cladding is nothing less than alarming.
If this stock gets taken off-line for remediation, supply constraints will become even tighter.
But whatever the case it is clear that supply will be lower in 2020 than in previous years.
Put them both together and it’s not hard to see why prices will continue to rise into 2020. Demand remains strong, and is accelerating. Supply remains constrained, and is contracting.
That’s a recipe for price growth.
And the figures from the Urban Development Institute for Victoria are typical. They show that after a brief period of excess supply in 2018, the market has now gone back into shortage.
It will get worse in 2020.
This shortage has persisted for years now, as supply has struggled to keep pace with consistently strong population growth.
And this, more than anything, is why prices have grown as much as they have…
… and why they’ll keep growing into the foreseeable future.