Australian Housing Market A Looming Shortage and its Impact on Prices and Rents

The Australian housing market is currently facing a significant challenge that is likely to have long-term effects on house prices and rental markets. A rapidly increasing housing shortage is expected to persist not only in 2024 but also for several years to come. This situation is the result of various factors and is poised to profoundly impact the housing market in the coming years.

Insufficient Dwelling Construction

One of the key reasons behind the housing shortage is the inadequate number of dwellings being built in Australia to cater to its booming population. A closer look at the chart below clearly shows the disparity between population growth and housing supply.

Australia has been grappling with a housing under-supply issue for quite some time. The situation has been somewhat mitigated by the high-rise apartment boom that occurred between 2017 and 2020. However, the easy gains from this boom have now been exhausted, and apartment construction is projected to decline significantly, leaving a massive gap in the housing pipeline.

The Decline of the High-Rise Boom

The Australian government had previously announced plans to construct 1.2 million new dwellings over the next five years. Medium-density and high-rise apartments were seen as crucial in addressing the housing shortage, as they allow for the addition of a significant number of housing units on a larger scale. However, builders are currently facing numerous challenges that hinder the realization of these plans.

Soaring Material Costs

The cost of building materials has skyrocketed, with some experiencing inflation rates of up to 18% per year. Although prices have come down to 8%, they still remain historically high. This makes large-scale construction projects risky and expensive for builders.

Construction Industry Crisis

Corporate insolvencies are on the rise across the country, with the construction sector bearing the brunt of the pain. This points to a struggling industry that is ill-equipped to handle a massive building boom. The crisis further exacerbates the housing shortage.

Trade Shortage

There is a shortage of skilled tradespeople in the construction industry. As a result, large infrastructure projects are competing for a limited workforce. This scarcity of skilled labor further cripples construction efforts and adds to the challenges faced by builders.

Grim Picture of Dwelling Approvals

The challenges faced by the construction industry are evident in the record-low number of dwelling approvals, despite the surge in Australia’s population. This stark disconnect between population growth and dwelling approvals paints a clear picture: housing supply is failing to keep pace with demand, and the gap is widening.

Inevitable Price Growth: Buckle Up for 2024 and Beyond

With the housing shortage expected to worsen in 2024 and beyond, the natural consequence will be continued upward pressure on house prices and rental costs. As the supply remains constrained and demand continues to rise, affordability will become a growing concern for many Australians.

Those with higher incomes or existing home equity will have the ability to move or upgrade, resulting in a fragmented property market. On the other hand, the “cheaper” end of the property market will suffer. Some homebuyers may consider purchasing townhouses or apartments, while others may opt to move to more affordable suburbs.

What Lies Ahead?

The convergence of a decline in high-rise construction, industry challenges, low dwelling approvals, and population growth paints a clear picture of a deepening housing shortfall. This shortfall will drive up property prices and rentals in the Australian housing market.

The government’s initiative to reduce future migration is unlikely to alleviate the housing shortage significantly, as the changes will primarily impact international students and temporary visas rather than permanent migration numbers.

While the housing shortage is expected to persist in the foreseeable future and pose challenges for some, property investors who take advantage of the current market situation will look back in a few years and wonder how they were able to purchase properties at such affordable prices.