Key takeaways
Fast population growth and multiple headwinds in the construction industry are contributing to Australia's worsening housing crisis. Government initiatives, such as subsidizing the construction of 1 million new homes in 5 years and incentivizing the build-to-rent sector, are insufficient to meet the housing demand.
The construction industry is facing challenges, including increased material and labor costs, which may delay future developments.
Insolvencies in the construction sector have surged due to rising costs and supply chain issues, leading to a decrease in new dwelling approvals and fewer properties for sale. The shortage of construction companies capable of meeting the demand, combined with a backlog of work, exacerbates the housing crisis.
The projected volume of additional properties in the pipeline will not be enough to meet the housing demand, resulting in a shortage of approximately 106,300 dwellings.
Property prices remain high, lending requirements are stricter, and interest rates have risen quickly, further impacting the rental market. Higher rents and strengthening returns for investors are a consequence of the supply-demand mismatch in rental markets, which is likely to continue.
Property investors should consider owning properties in suburbs where tenants can afford higher rents over time, based on their income growth and stability.
Fast population growth and multiple headwinds for the construction industry mean Australia’s housing crisis will only worsen - even with the government’s plan to increase housing stock a solution is still far off in the distance.
A new PropTrack New Homes report for May reveals data that suggests that government initiatives to meet growing population levels and ease the housing crisis aren’t enough.
In its budget last year the government announced it would subsidise the construction of 1 million new homes in 5 years.
This year's budget also included plans to incentivise the build-to-rent sector in Australia and increase new rental properties by 150,000 over the next 10 years.
But the Australian Bureau of Statistics recently revealed that our population could reach as much as 36.1 million by 2041 - an increase of 9.7 million people in 20 years - the number of dwellings these government incentives will produce is way off what is actually needed.
For context, the number of households is projected to rise by an additional 4 million, surpassing 13 million, over that timeframe.
But in the past 20 years, the total number of dwellings completed was only 3.4 million, at a time when the population rose by 6.5 million, the report’s author and PropTrack senior data analyst Karren Dellow, points out.
Migration has also rebounded with the largest quarterly net inflow of overseas migrants on record in the September 2022 quarter at 106,000 people, with another 650,000 migrants expected to arrive by the next financial year.
The government’s proposed 150,000 additional rental properties are not nearly enough to cover the influx of people expected to arrive in the near term.
And not only that, several other issues may make even that 150,000 rental properties a pipe dream.
Headwinds still face the construction industry
A record pipeline of construction work has yet to start, driven by the increased cost of materials and labour could delay the construction of future developments.
In fact, Dellow points out that there is $54 billion in construction which has not yet been completed, and a further $16 billion hasn’t started.
There was nearly $70 billion in construction work in the pipeline at the end of December 2022, 56% higher than pre-pandemic (March 2020 quarter).
But available construction workers are occupied with current developments, creating a backlog in projects.
Insolvencies have surged, pushing construction levels down further
A key issue facing the construction sector, which hasn’t been addressed or targeted by the government, is the severe undersupply of workers.
The construction industry has seen a surge in insolvencies as rising labour costs, extreme weather, high material costs and shortages and global supply chain issues forced many to close their doors.
According to the Australian Securities and Investments Commission (ASIC), there were 1601 construction industry insolvencies over the 3 quarters to March, a third of which happened within the first 3 months of 2023.
Unsurprisingly, Dellow adds, this has affected the number of new dwelling approvals, which were down 17.3% year-on-year in March 2023, and have been trending downward since the peak in March 2021, fuelled by the Home Builder Grant.
She also explains that these lower approvals are flowing through to a lower number of properties for sale.
Realstate.com.au data shows listings for new developments have dropped 13% from their peak in November 2020.
The outlook for our construction section
While the government has committed to easing our housing shortage over the next 5-10 years, the report shows that the promise falls short of a real solution to our worsening property supply crisis.
The number of construction companies able to do the work is both in short supply and overwhelmed by a backlog of work and soaring demand for their services.
Even the volume of additional properties in the pipeline won’t be enough to meet demand.
According to the National Housing Finance and Investment Corporation, the shortage will be around 106,300 dwellings, meaning our housing crisis looks set only to continue.
The bottom line…
It is a bleak time for tenants facing short supply and higher prices as the rental crisis continues to deepen, particularly in our capital cities.
And this is also at a time when property prices are still high, lenders have tighter lending requirements and interest rates have risen quickly.
Higher rents and strengthening returns for investors are a clear consequence of a mismatch between supply and demand in home rental markets.
Higher mortgage interest rates for investors are also likely to be passed on to tenants providing more upward pressure on already high and generally rising rents.
And while property investors can look forward to rising rental returns, an investor’s future income will be dependent upon their tenants' ability to keep paying higher rent over the years.
That’s why it’s important to own properties in the right suburbs - those where tenants will be able to afford higher rents over time rather than suburbs where the tenants are only a week or two away from going broke.
In general, these will be locations where tenants are aspirational and have a good income and are likely to have increasing income over time so they can pay you more rent.
