Nothing is going to change until the whole market adjusts.
There’s only one way to fix the housing crisis, but no one wants to mention it.
The answer?
Higher prices.
That’s the only way we can make the current pipeline of projects viable.
Industry leaders were dancing around it the other day, with Metricon CEO calling on the government to do more. He reckons housing needs a ‘wartime response’:
Metricon Homes CEO Brad Duggan warns that Australia cannot house its growing population, and believes the federal government must adopt a “wartime response” to the housing crisis.
Based on current construction rates, Duggan adds that the government’s target of building 1.2 million homes in the five years from mid-2024 will likely fall about 300,000 short.
“The future of our country in terms of our economics is based upon whether we can house a growing population and we can’t”, he said.
“I think we need a wartime response. When we look back over the last three years of this government we’ve not had a wartime response”.
“The customer needs to have confidence on their financing costs, confidence in the build journey and they need the tax environment that inspires them to invest and build rather than destroy that confidence”.
So there’s the favourite bug-bear of developers, taxes.
But is anyone talking about red or green tape? Oh yes, Frasers Property Australia CEO Cameron Leggatt:
“If we are going to call it a crisis, we must treat it like one. This includes addressing the solutions which are immediately available, such as blockages in the planning process”, he said.
“Increasing supply means addressing deficits in market capacity, labour and planning systems – the red tape and green tape”, Leggatt argued.
Sure. But the fundamental issue here is a mismatch between the cost of bringing new supply to the market, and the price that new supply currently receives.
You can help fix that a little by reducing costs – lowering taxes, speeding up planning etc.
And it would help at the margin.
But it’s probably not going to make a massive difference. Most large-scale developers I speak to reckon that prices have to go up 15-20% to make projects viable.
But right now, prices seem to be going in the wrong direction, at least for standalone homes.
While apartment construction is limply drifting higher, standalone construction has weakened in recent months, with evidence that builders are offering discounts:
“It would be more helpful if house approvals were also recovering,” said CreditorWatch chief economist Ivan Colhoun.
“These have softened a little in recent months, likely reflecting some overhang of stock, which has seen builders discounting project homes.”
It was unusual to have apartment approvals strengthening while house approvals were weaker, Colhoun said.
“The [official inflation data] has been revealing discounting by builders for new home builds, which may well be part of the reason, while larger apartment projects may be benefiting from some recent easing in construction material prices….”
It’s kind of pointless to look at this in isolation.
Given the explosion in construction costs post-Covid, the only way to make projects viable is for prices to go up.
But that can’t be just for new builds, since new and old are fairly substitutable. The whole market has to correct.
There’s just no way around this.
Prices have to go up.
And they will.
JG.