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Cautious consumers could create a critical housing shortage

When the Reserve Bank started slashing interest rates last year, a lot of industry experts enthusiastically declared that the end of the real estate downturn was nigh.

And why wouldn’t they given that in the past, a steady decline in interest rates and the promise of future cuts have aided in stimulating the housing market and increasing buyer activity?

Times have changed though and consumers are far more cautious about spending in general, as is evident from recent figures released by the Housing Industry Association (HIA).

In a recent media release the HIA warned that he Australian housing industry is facing its worst conditions in decades and that new home building has collapsed and jobs are being shed across the country.

“If the current conditions continue housing starts will fall below 130,000 for the year” said Shane Goodwin, Managing Director of the Housing Industry Association.

“To put this in perspective, that’s about 30,000 dwellings below what is needed just to meet underlying demand for homes.”

“The industry has suffered 8 years of declining new housing activity, which combined with current low levels of activity places us on the brink of recession.”

Australia’s large and small builders, and building product manufacturers together issued

“Governments must collectively arrest the looming crisis…”

With the number of new build starts commonly used to determine the health of a major sector of our property markets, these latest numbers are making a lot of people concerned.

Rather than demonize the recent lackluster performance of our capital city property markets though, the HIA suggests government policy – specifically high taxes – is the major cause of the recent downturn in residential construction.

“The number one issue in terms of why new home building is so low is the level of taxation on new housing,” says HIA senior economist Andrew Harvey.

“The primary issue outside of that is confidence at the moment.

“Consumers are being pretty cautious and paying down debts, so when you get an interest rate cut it does not have the stimulatory effect it did in the past.”

Recently Paul Braddick, head of property research at ANZ said, “We are quite pessimistic about the new home building outlook for the next 12 months, you just have to look at the approvals numbers over the last year.”

“It is not yet even showing signs of finding the floor before seeing any upswing.

“From our perspective we are quite clearly underbuilding, new dwellings are running at a completion rate of 120,000 at the moment comparing to a long-term average of 150,000.

“Our estimation of housing demand based on demographics is 180,000.”

Braddick cautions that all of this adds up to the likelihood of a significant housing shortage, particularly in the NSW market, with the level of building scheduled over the next 12 months adding to the issue.

“Until prices find a floor and housing market sentiment generally starts to improve we are unlikely to see a sharp turnaround in building activity, particularly if we only get one more interest rate cut.

“It is hard to see what the catalyst for the turnaround is actually going to be in the next few years.”

 



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Cautious consumers could create a critical housing shortage' have 4 comments

  1. Avatar for Property Update

    June 5, 2012 @ 11:21 am Darryl Smith

    If there is a shortfall of houses of 30 000 where is everyone living and should this shortage put upwards pressure on house prices due to increased demand?

    Reply

    • Avatar for Property Update

      June 5, 2012 @ 2:32 pm Michael Yardney

      Darryl
      I see your point – we don’t have people living on the streets.
      Instead they are staying at home with their parents longer or sharing rented accommodation more

      Reply

  2. Avatar for Property Update

    June 6, 2012 @ 9:58 am Darryl Smith

    Thanks Michael. I suppose the main thrust of my comment is about the upward pressure on house prices. Shouldn’t a shortage lead to increased prices…………the old supply and demand issue. Why are we not seeing this upwards pressure?

    Reply

    • Avatar for Property Update

      June 6, 2012 @ 2:27 pm Michael Yardney

      Darryl
      You are right – this will eventually happen as the cycle moves on.
      Rents increase, so investors return as yields improve, esp as interest rates drop.
      Some tenants find it cheaper to buy than rent and they also enter the property market. These 2 factors push up property values

      Reply


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