Supply hasn’t kept pace with housing demand for years. It’s not about to.
As I’ve said a few times, understanding the trajectory of house prices is mostly just understanding what’s happening to the balance of supply and demand.
And as I’ve also said a few times, demand continues to far outstrip supply, giving us a chronic housing shortage.
And there are just no signs it’s going to get better. In fact, it looks like it’s going to go from bad to worse.
Starting with the bad, the current data suggests that we’re not building anywhere near enough homes right now.
Only 163,000 homes were approved for construction in the year to January 2024.
That’s a pretty ordinary result at the best of times, but when the government has set itself the target of 240,000 homes a year to meet its ‘ambitious’ target, it’s a miss of 77,000 homes, which is pretty substantial.
But sadly, it’s only going to get worse:
New forecasts from the Urban Development Institute of Australia (UDIA) warn that only 79,000 new homes will be finished in 2026 across the combined capital cities, a drop of 26% compared with last year.
So we’re going to miss the target by 77,000 homes this year. By 2026, we’re going to be missing the target by 163,000 homes.
You’re going to notice that.
That’s a picture of a housing crisis going from bad to worse. Which will cause house prices to go from higher to higherest.
But the biggest problem here is not that there isn’t enough demand for new homes (there’s heaps), or that there isn’t enough land or shovel-ready projects (also heaps).
It’s that the building industry is getting smashed.
There are acute shortages of labour, material costs have exploded, and builders all over the place are still going broke.
On that front, corporate insolvencies are trending upwards in Australia. They’re up 40% year on year.
However, that’s almost entirely due to a life in construction sector insolvencies. 270 construction firms went under in February 2024, up from 195 for February 2023 and nearly triple the number that went bust in February 2022:
This is why the construction outlook in UDIA’s forecasts is so dire.
And it’s also why it’s such a tricky puzzle for the government. Canberra and the states are trying to streamline processes and ease planning restrictions, but the big challenges here are economic, not legislative.
It doesn’t matter what incentives are in place at the planning level, if it’s just not economic to build new houses, then no one is going to do it.
And how do you make a housing project economic?
You increase prices.
Prices have been slow to adjust so far, but I’d expect the price of new builds to launch in the next year or two.
… which will pull the rest of the market with it.
JG.
Alfred F Hinton says
The government must try to settle it economic reform because the demands for housing issues is rising daily