Housing Shortage Looms, Pushing Up Prices

Posted on 28/10/2019  
Housing Shortage Looms, Pushing Up Prices

The construction downturn will create a shortage of apartments by 2020, the Commonwealth Bank has forecast, pushing down vacancy rates and putting upward pressure on rents and prices.

The bank says strong population growth, a shortage of supply and a revival in home price growth will mean that the building downturn will hit bottom sooner than expected, around the middle of next year.

"Our estimates suggest an undersupply of apartments from 2020," CBA economist Kristina Clifton says.

"On our calculations the decline in residential construction is taking place at a time when the excess supply of dwellings is relatively small.”

She says that, despite the building boom in recent years, residential construction is below average relative to population growth.

Rising house prices in the major markets, on the back of recent favourable events, will also encourage more building net year.

"The Coalition election win, the RBA's interest rate cuts and APRA’s changes to serviceability metrics have seen the housing market turn around,” she says. “We expect moderate dwelling price gains over the second half of 2019 and 2020."

Industry leaders have also spoken of a potential supply shortage within 18 months. Mirvac chief executive Susan Lloyd-Hurwitz says that without credit flowing again, Australia may find itself with a housing shortage within a year, echoing concerns from the Reserve Bank.

"Very soon we are going to be in a supply shortage situation," she says.

The chief executive of Australia's biggest developer, Stockland's Mark Steinert, agrees. "We need 180,000 dwellings a year to keep up with demand, and it's not going to happen," he says.

Reserve Bank governor Philip Lowe has also warned of how a supply shortage could see a rebound in prices.

"It seems to me quite possible that we could have a period now of rising housing prices, because construction activity is slowing while the population is still rising quite quickly,” Lowe says. “So there are some underlying drivers of housing prices."

RBA deputy governor Guy Debelle says the speed of the decline in residential construction activity for both apartments and houses has taken the RBA by surprise, and that the central bank forecasts a further 7% fall in dwelling investment over the next year.

"Given the large size of the pipeline, we had expected construction activity to remain at a pretty high level for most of this year, but it turned down sooner and by more than we had expected," Debelle says.

Stockland is stepping up the pace of development to meet a housing shortage it says will become apparent next year, as a result of stronger investor and retirement living markets that are overlapping with a fall in new housing starts.

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