Australia's housing crisis is escalating, with a significant shortfall in construction meeting government targets. Economic instability and high interest rates are exacerbating the issue, leaving many Australians unable to secure housing. Discover the underlying factors and future implications in this detailed analysis.
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We may not have enough houses for Australians to live in over the next 5 years.
That's not just clickbait...that's the reality playing out right now.
That's why in this article, I want to cover things like:
So if you're interested in what my thoughts are, definitely keep reading.
We’ve been hearing for the better part of the last three years that we may have a construction issue, but the reality is: We actually have an economic issue.
What I mean by that is we need to look at the economy as a whole before we decide, “Oh, housing construction is the issue. That’s where we need to fix it,” because the Reserve Bank of Australia (RBA) has come out and said: “There is no quick fix,” and I actually agree with them.
Now the truth is…In 2020 and 2021, everyone was really happy with making all this money by staying at home, while asset prices were going through the roof.
We were all so happy, and it was a wonderful time, BUT not really, because we had lockdowns, and that's why we had all this artificial stimulus in the economy.
At that point, I also mentioned on my YouTube Channel that: “Hey, we might have a problem with inflation coming soon, so we better prepare.”
Now that we've had inflation around for a while, we're like: “When does this ever end?”
The reason why that's so important and ties all of this together is: Interest rates.
Inflation needs to remain between 2% and 3% for the RBA to reduce the interest rate.
Now, you may be asking me: “Why is the interest rate important, Ravi?”
To answer you: It's the cost of borrowing. So if we have interest rates where they're at, at the moment, it means that a lot of people are unable to borrow enough funds to be able to:
One of the flow-on effects from that is that: Nobody really wants to construct a new home, because they can't get the borrowing for it.
Even worse is the uncertainty around the economy, which means most people are saying: “I would rather not build a house right now, because I have no idea what interest rates will look like in 12 or 18 months' time,” and that's a great segue into what I've been warning you guys not to be doing, which is: Buying off-the-plan stuff.
Over the last couple of years, imagine having bought an apartment off the plan or a house and land package where you said: “Okay, well, I can afford this, because interest rates are at 2.5% or 3%... No problems, I can do this.”
Well…yes, property prices in some areas have gone up but in many other areas, they have not.
What's worse is even if they did go up, you can't do anything about it because so many people, unfortunately, now have to deal with getting servicing at interest rates that are three or four times higher than what they were initially getting. So now, if you can't complete a build, you don't have a house and you probably lost your deposit as well. That's the scary part about buying new.
Now, if we look at right now and say: “Well, the counter could happen here, let me buy something now and then in a couple of years, interest rates surely come down.”
Well…that’s the uncertainty, and that uncertainty is keeping a lot of people on the sidelines from going and building a new home, and that's what the data is suggesting. It's suggesting that people don't really have an appetite to take out a loan for a new building, further cascading the problem where:
Now, for the unique few that are going out there and saying: “Okay, I have the ability to borrow, so I'm going to borrow, and I'm going to go and build a new home.”
Well, I can do that, but unfortunately, I have to go through the government, and what you might not know is that: The planning approval stages are absolutely whacked.
The numbers have gone and blown out by 20%, 30%, and 50% in some cases, as to how long it takes the council to actually approve a new dwelling. So much so, that some councils are turning to AI to speed up the development waiting times.
This is another problem that leaves people (like myself) scratching their heads going: “Why is it so much harder now than it was before, especially because right now, we don't actually have that much to approve…so just approve them. We know we have a problem with housing supply. So why not just go out there and actually just approve faster? I don't know…”
Now the Urban Development Institute of Australia has just launched a new dashboard, and for someone like myself who likes data and likes playing with these things, I thought it would be really wise to share something like this with you guys, because I think you're going to find some value from it.
So this is the interactive UDIA housing index and UDIA housing dashboard. Now it may make no sense at all, so I'm going to summarise it and make it really simple to understand.
Much like consumer confidence, 100 means: we're good.
Anything above 100 means: well, it depends on what side you're on, if it's supply or demand. But, it often means it's an overkill, so it's overheated.
If it's under 100: we have a situation where we're under-supplied or there's not enough demand for something.
So let's have a look at where the demand looks like:
At the moment, what we can see is we are covering off in the blue, which is the original, and then red, which is seasonally adjusted.
Now, I would look more at the seasonally adjusted because it's more of an average and it smooths out all the ebbs and flows. What you can have in one month doesn't really occur in the following month, so that's what I'll go with.
If you look at:
So this is essentially saying: Demand for housing is higher than where it should be, and you can see why. It's mainly due to the fact that:
Now that's from the demand perspective. If you just looked at that and said: “Well, demand's really high, so that means prices will go higher,” what we need to see is supply. Because if supply is at 150, then you've got an imbalance where supply is higher than demand, and we all know what that means, which is: Prices go down.
Now, is that the case?
Well, supply is at 89 and as I said before: if it's above 100 we are good to go, but if it's below that 100, we don't have enough houses being built.
What’s crazier is when you actually see the effect of what the home builder stimulus had, we would have seen this ratio or this number go up to 111. This is because there were incentives to go out there and build.
Now what we're seeing is a complete downturn and we are now at levels around 85 to 89, and this number is not slowing down anytime soon.
So when you look at quarter on quarter, it's down 0.3% and if you look at seasonally adjusted it's down 1.3%.
Now when you take a look down here, you can see rental listings falling quite dramatically.
Although Resi construction work has been increasing…
We just don't have enough dwellings commencing, and that's pretty much in line with dwelling approvals going down. One of the biggest reasons for that is: Home approval times.
Now, we've had the Australian government come out and say: “Look, we're going to build 1.2 million homes,” which would mean: We'd have to be building 240,000 homes every single year.
Well, let's see how we're tracking for that because I don't think it's going to work out, and that's exactly what we can see in this graph:
What we can see is that the numbers, although on this chart go to 2023, are nowhere near where they should be in order for us to reach the target of 1.2 million.
The reason why we have such a big issue is going back to this graph, which is the Australian net overseas migration.
As you can see, it says here, this is normal immigration….But the red arrow above in 2020 onwards highlights, this is not normal.
When you overlay this with how many approvals are happening in the country, we then see a big, big problem. That's why you'll still see that rental prices, although they have been decelerating in terms of price growth, are still really, really high. In some areas, they're 50% to 60% higher than before the lockdowns actually occurred.
KPMG Australia conducted some analysis around where these homes were supposed to have been constructed but haven't started. They found that nearly 40,000 homes were yet to commence. About half of these homes were for Sydney and Melbourne. They're getting approved, but they're not commencing, which is also another problem.
If you think of roadblocks and stage gates, you've got people going out and saying: “I want to borrow,” then they have the ability to borrow, get the approval, and then actually commence construction after they've got approval to see it all the way through. This problem is not a quick fix. That's why the RBA is also coming out and saying: “Unfortunately, our hands are tied.”
The RBA knows that if they drop interest rates, they can:
However, even if they did decrease interest rates and cut interest rates in 2024, (like we're all hoping they do), unfortunately, it doesn't mean that by 2025, January comes around and we suddenly have 40,000 new homes.
Now, check this out:
The Australian Financial Review reported that Australia ranks 23rd out of 33 developed countries for the number of dwellings per 1,000 people, highlighting Australia's ongoing housing shortage.
Despite promises to improve housing supply, figures in the article show that the housing crisis is only worsening, with development approval waiting times reaching up to 4 months in Victoria and New South Wales.
Additional numbers from the Organisation for Economic Co-operation and Development showed that dwellings per 1,000 fell from 92% of the OECD average to 90% over the last decade.
When we talk about predicting house prices, where prices will be—it is not as important as knowing what the underlying factors are.
Now, I could chuck a bunch of data and statistics at you guys, but I'm going to simplify it all right now.
The cost of construction materials is still up about 33% since the lockdowns actually occurred.
When you have the cost of building, along with every other issue we've just explained, it means that unfortunately, for the next 18 to 24 months, we will not see levels of supply that we need in order for us to even normalise the market, let alone crash the market.
There are people out there way smarter than me that I have had chats with, and they have actually told me: “Ravi, there is no evidence…ever…that we have seen prices go down when it comes to a crash of 10%, 15%, 20% without having an oversupply in that market.”
So this is something for you to take away: if we're still 18 to 24 months from getting supply to neutral, where do you think prices will be in the next 18 to 24 months? Is it going to crash because we have an oversupply?
Well, based on all the data points that I've just shared here, all my research, plus talking to people way smarter than me, it doesn't look likely.
This would all tie in with the 18.6-year cycle quite nicely, but it could probably extend a little bit further because we still have the tap of migration.
If we can get supply up to the levels we need, and the government still introduces more immigration, unfortunately, we still have an undersupply of homes.
I hope this article allows you to understand exactly what the dynamics are when it comes to the housing crisis and the rental crisis here in Australia.
If you're interested in what my thoughts are when it comes to property analysis and so much more, continue reading my blogs and definitely subscribe to my YouTube channel.
PS - if you want to know the secrets to how the filthy rich are achieving what they are, have a read here: (Enter blog)
I hope you guys have enjoyed this one. I'll catch you in the next one!
Thanks, everyone!
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