We’re not going to build all those approved dwellings, are we?

Since the start of Covid, we have seen a large jump in the number of dwelling approvals across the country.

And during this time, due to limited overseas migration, the demand for new housing has actually fallen.

But now, Australia is facing a potential oversupply of new homes.

Yes, an oversupply!

This is also factoring in the expected rise in overseas migration.

In short, assuming that much of the dwelling stock approved over the last couple of years is actually built — then Australia is facing an oversupply of some 195,000 dwellings or about 57% more than actually needed since the start of the pandemic.

How did this happen?

There's a comparable mismatch between a bugling pipeline of building approvals and houses built was also experienced in the wake of the GFC, where demand was similarly supercharged by government incentives and RBA action.

Back in 2007-2008, temporary indigestion underpinned a lengthy period of above-average construction as the sector worked through the backlog.

There are actually some 270,000 new homes that have been approved in recent years but are either still under construction or have yet to be built.

At present there is a need to build some 158,000 new homes across Australia this year and these 270,000 yet-to-be-built homes - when supplied - will help alleviate some of the rental undersupplies around the country.

The key thing here is if or when they get built

Building costs rise and builders are going broke.

In fact, the cost of building a dwelling has risen by 23% since the start of the pandemic, with rise-rise apartment costs rising by a whopping 57% since March 2020.

Whilst, the recent rise in building costs is not unprecedented, they have come as a shock given the long-term downward trend.

Given current world events and The West’s climate mindset, I believe we are now facing higher for longer interest rates with inflation baked in.

Inflation is proving to be much more structural and geopolitical than many realise.

I think it will be increasingly used as a tool and even a weapon.

On that note, the RBA – for mine – will follow the Fed when it comes to interest rates.

Our currency will need support, otherwise, we will import even more inflation.

At present, the current RBA 2.35% cash rate is forecast to approach 4% by mid-2023.

Rising interest rates will see fewer of the houses approved in recent years actually get built.

Moreover, Canberra gabfest – again in my opinion - could see building industry-wide agreements when it comes to enterprise bargaining.

At present, such influence affects large housing builds – explaining in part why we have seen a 57% increase in the price to build a new high-rise apartment building in recent years – but in the near future, union sway could affect smaller-scale home builds too.

This would reduce the number of new homes built and further increase their cost.

So, whilst the maths suggests an oversupply of new homes – even when factoring a lift in our immigration intake – on the ground, there is likely to be not enough supply.

That is why I think that - after a short-term housing price correction - that the Australian housing market will plateau in terms of value for some time.

The undersupply of new housing should place a floor under the market.

In contrast, rents are likely to continue to rise.

And more will be forced to share accommodation, due to high costs and also a lack of supply.

These trends will also affect state government revenues – especially in the form of stamp duties and infrastructure charges – resulting in other, and often more aggressive, ways to tax the housing market.

About Michael Matusik Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive