Housing supply likely to worsen before it improves: Economist

Financial services group AMP’s chief economist and head of investment strategy Shane Oliver has said that housing undersupply is likely to get worse before it recovers.

In a recent update, the economist said that with immigration levels remaining high and approvals falling short of the government’s objectives, the construction of new housing was likely to “remain depressed”.

Oliver said: “Unfortunately, the housing shortfall looks like it will get worse before it gets better. Immigration levels are likely to slow over the year ahead but still remain high and housing construction is likely to remain depressed in the face of cost pressures and capacity constraints.”

In the past 12 months, 163,500 dwellings have been approved for construction, “well below” the government’s target of building 240,000 dwellings a year starting July 2024, according to Oliver.

Furthermore, the Australian Bureau of Statistics (ABS) revealed that the population grew 2.5 per cent (or 660,000 people) in the 12 months to September 2023, while approvals remain low.

The economist said: “The chronic housing shortage got the upper hand over high interest rates last year as immigration levels surged and continues to be the main driver of rising property prices.”

He continued that the home building industry is struggling to keep up with increased supply costs and labour shortages as approvals fall. While worsened affordability and high mortgage stress have had a significant negative influence on the property market, according to Oliver, housing undersupply has dominated buyer hesitancy to purchase homes.

The housing supply issue has been a focus for government, with Dr Steven Kennedy, the Secretary to the Treasury, acknowledging to the Economics Legislation Committee on Monday (3 June) that “the market supply of housing continues to be too low to meet demand, particularly in recent years”.

This is despite a large number of medium-high density dwellings being built between 2014 and 2018, when low interest rates encouraged a significant pick up in investor activity.

However, suply has been exacerbated by subdued vendor activity, supply chain bottlenecks in inputs to construction and higher inflation, a lack of essential infrastructure in greenfield development sites, critical shortages of skilled labour and low productivity, a long‑term under‑investment in social housing by governments, and increased costs of materials and financing needed to build homes, he said.

The Treasury Secretary noted that the Government has “addressed some of these distributional effects through changes to Commonwealth Rent Assistance” (with the 2023–24 Budget including a further 10 per cent increase) but added that “meaningful progress cannot occur unless the states use their policy levers to boost supply and, longer‑term, allow the housing supply to adapt more flexibly to changes in housing demand”.

Home values might rise another 5%: Oliver

In the meantime, house prices continue to rise.

Following an 8.8 per cent gain in house prices last year, AMP’s Shane Oliver said he expects house prices to rise a further 5 per cent this year, constrained by high interest rates restricting demand and rising unemployment.

Oliver said that while supply shortfall indicates increased returns for sellers, stubborn interest rates (now held at 4.35 per cent since November 2023) and talk of rate hikes are likely to cause buyers to “hold back” and for distressed listings to increase due to rising unemployment.

The Commonwealth Bank of Australia’s (CBA) senior economist Belinda Allen has also this week predicted a 5 per cent increase in home values for the calendar year 2024 but said that monthly increases were “running ahead of our expectations and there are clear upside risks”.

Earlier this week (3 June), CoreLogic released its May Home Value Index, which revealed that home prices increased 0.8 per cent in May, the largest increase in property prices since October 2023.

CoreLogic revealed that there was a particular increase in home prices in Perth (2 per cent), Adelaide (1.8 per cent), and Brisbane (1.4 per cent). Sydney and Melbourne home values increased by 0.6 per cent and 0.1 per cent, respectively.

The increase in home prices in May was driven by midsized capital cities including Perth and South Australia, according to CoreLogic’s research director Tim Lawless, who said that this was likely due to “extremely low levels of available supply” in those cities.

Lawless said: “The number of properties available for sale in Perth and Adelaide remain more than -40 per cent below the five-year average for this time of the year while Brisbane listings are -34 per cent below average.”

Across the capital cities, CoreLogic found that listings were 16 per cent below the previous five-year average and 2 per cent lower than last year.

[Related: Rapid population growth worsening housing supply shortage: UDIA]