It’s clear that Australia is suffering from a chronic property supply shortage, and with a focus on our rental crisis and high mortgage costs, the pipeline of residential construction will be more important than ever.
The problem is, many viable solutions - such as the Government Housing Accord’s commitment to building 1.2 million new homes by 2028 - fall short.
PropTrack economist Paul Ryan has delved into planned development, and it appears they won’t be built in the right place.
Instead, he suggests that solutions to the housing shortage should focus on building close to our major cities where people want to live, where prices are highest, and services are plentiful, as well as policies to better use existing well-located homes.
Here’s a look at the data.
New supply is thin…
During the pandemic, there was a short peak in residential construction thanks to significant government support for the construction industry, such as HomeBuilder, which had a large effect on the increased number of houses that were constructed (and are still under construction).
But soaring materials and construction costs mean that the increase in supply plummeted quickly, with fewer new dwellings completed.
In total, 120,000 fewer homes - almost all units and townhouses - were built throughout the pandemic than construction rates from 2016-2019 would have produced, PropTrack shows.
As the economy recovered from the pandemic, new unit and townhouse construction has continued to fall.
And since then, new headwinds face project developers.
Supply disruptions from the war in Ukraine, and lockdowns in China mean material costs have increased considerably; tradespeople remain scarce; and higher interest rates have perpetuated project financing difficulties.
These challenges also mean there has been an uptick in the number of building companies going into insolvency.
And therefore, overall, the supply of new-build properties is currently much lower than before the pandemic.
And what is being constructed is in the wrong place…
There is still some construction happening though, but the problem is, they’re being built in the wrong place.
Development plans for units and townhouses won’t line up with where people want them the most.
Many developments are happening 30-40km away from the city centres, or on the fringes of the city.
In fact, PropTrack data on dwelling approval locations shows that in Sydney and Melbourne, where 40% of Australians live, a large share of homes approved to be built is 30 to 50 kilometres from the CBD.
This isn’t where people want to live.
It’s far from the CBD, transport links are either non-existent or slow and long and many of the purpose-built areas lack the all-important 30-minute neighbourhood, community, and lifestyle appeal.
But, recent work by the NSW Productivity Commission and Peter Tulip at The Center for Independent Studies shows that in inner Sydney, new homes are much more expensive than their cost of construction.
Which means that allowing more homes where values are highest would also lower the cost of housing.
“It is clear that zoning and planning processes, which mean the approval process for new projects can take years, are a key impediment to building more homes where people want to live,” Ryan said.
Construction should happen where it’s needed most…
Yes, we would all like to live closer to our city centres.
But the problem is, properties in inner-city Sydney and Melbourne don’t have enough space to house current residents, Ryan explained.
In the 2021 Census, the ABS calculated there were 178,000 more bedrooms needed by households in Sydney and Melbourne – predominantly in homes close to the CBD.
So, again, building where people want to live will also help where the housing shortage is at its worst.
We need to encourage downsizing
The good news is that there is a significant supply of spare rooms in these same areas - the areas that people want to live in but where there isn’t enough space.
In Sydney and Melbourne alone, 1.28 million homes have more than one spare bedroom, PropTrack said.
These spare bedrooms are also predominantly located 10 to 30 kilometres from the CBD – where people need housing the most - and are most willing to pay for it.
A large portion of these homes are owned by baby boomers, who have paid off their mortgages, their children have left home and they’re sitting in 3- or 4-bedroom houses with space to spare.
So incentives should be encouraged to help free up big-family homes for those who need them and encourage older people to downsize and move into more suitable properties.
This is the solution
PropTrack explains that restrictive planning and heritage rules in many sought-after areas are to blame for the lack of new supply because they make development in these areas both difficult and costly.
Rules also dictate that current residents get a say in development decisions, at the exclusion of those who would benefit from more homes.
But, with higher property prices and building costs, these challenges are getting more attention and the NSW state government, for example, has proposed large developments with 15% allocated to affordable housing.
“Other policies, and coordination, are also needed to alleviate the challenges the construction industry is facing, so projects can be commenced as soon as possible,” Ryan said.
That’s because these policy changes can help to unlock the supply of housing already available.
“Moving away from stamp duties which penalise moving, to broader land taxes that incentivise people to live in homes that best suit their current circumstances has big benefits and doesn't require any new development,” he said.
“Current exemptions for the family home in pension asset tests also discourage many from moving.
“The solution to the current housing crisis is a combination of allowing more homes where people want to live and policies that encourage better use of the homes we have.”
And it creates an opportunity for investors
I see a window of opportunity for property investors with a long-term focus at present.
This window of opportunity is not because properties are cheap, although, when you look back into three years' time the price you would pay for the property today will definitely look cheap.
The opportunity arises because currently consumer confidence is low and many prospective homebuyers and investors are sitting on the sidelines.
And remember, 2023 will be the year our property markets reset and the beginning of a new property cycle.
Sooner rather than later many prospective buyers will realise that interest rates are near their peak, and inflation will have peaked as the RBA's efforts have brought it under control.
And at that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
We saw an opportunity like this in late 2018 - early 2019 when fear of the upcoming Federal election stopped buyers from entering the market.
And look at what's happened to property prices since then.
I saw similar opportunities at the end of the Global Financial Crisis and in 2002 after the tech wreck.
History has a way of repeating itself.
Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.
The bottom line
While the current property market might not be attractive for investors right now due to high costs, government interventions, and low supply, it’s important to remember that property investment is a long-term game.
Don’t try to time the market - this is just too difficult.
And don’t hunt down a bargain.
All investors should focus all their efforts on buying an investment-grade property in an A-grade location.
These types of properties are in short supply but are still selling for reasonably good prices.
Plus they’ll hold their value far better in the long term.
