People often ask me why I am so optimistic about the outlook for continued strong growth in residential housing values in Australia.
It’s quite simple. The housing market is a classic example of supply and demand economics, and for the foreseeable future, it’s clear that demand will continue to outstrip supply. The basic equation is this - our population is growing strongly, and we can’t build new homes fast enough to keep up.
That means that over the medium term, prices have only one way to head - up.
Official population figures haven’t been released yet, but it’s estimated that in the year to the end of September, Australia’s net migration intake was a whopping 500,000.
That’s enough people to fill a city the size of Hobart - twice - coming into the country each year.
In the face of growing political pressure, the Federal Government is due to announce a migration overhaul.
There’s also some evidence that net migration may have peaked, as many international students on temporary visas whose studies were disrupted by COVID-19, finally leave the country for good.
But my tip is this - don’t expect a drastic fall in those numbers.
In fact, at a time when Australia’s population has been increasing, we have actually been building fewer and fewer homes each year. And guess what? As you can see from this ABS chart, this was actually a trend before COVID-19.
Here’s another way of looking at it:
Given longer-term population growth trends, it’s estimated that Australia needs to build at least 210,000 new homes each year. The latest ABS dwelling stock figures show just 147,000 new homes were built in the 2021/2022 financial year.
That is a massive shortfall!
What’s going on?
Sure, there have been supply chain disruptions affecting building materials over the last couple of years, but there is also a dire shortage of construction workers and tradies in Australia.
There’s also fierce competition for the existing pool of skilled workers.
Many tradies who used to work in residential construction have been poached to work on huge government infrastructure projects, like Melbourne’s Metro and West Gate tunnels and Sydney’s WestConnex, often for far better pay.
Master Builders Australia says it has a solution.
It wants the Federal government to offer builders $10,000 for every skilled foreign worker they attract to Australia. The idea is the $10,000 payment would help cover visas, moving costs and temporary accommodation.
According to the Sydney Morning Herald, Master Builders believes “the industry will need 480,000 new workers by November 2026 to keep construction work at current levels”.
But as the SMH’s David Crowe points out, “this does not include the additional workforce needed to meet the federal government’s housing target or its plans for renewable energy projects and new electricity transmission lines.”
Another building industry group, the Australian Constructors Association, says tax breaks to attract overseas construction workers to Australia could help.
The ACA represents many of the big building firms like Multiplex and Lendlease. The Association’s CEO, John Davis, was asked just how many more workers were needed.
“Infrastructure Australia did a report at the back end of last year, which is just about to be updated in the next few weeks”, he told ABC Radio Melbourne.
“That talked at that time of being 214,000 workers short. And I don't expect when that new report comes out, that number to have gone down.”
So are there many construction workers who would be prepared to come to Australia?
“Every other major jurisdiction around the world is spending big on infrastructure, and so there is a real competition for resources”, John Davis says.
In fact, figures show that of the nearly 300,000 skilled and employer-nominated visas issued by the Federal government between May 2022 and August this year, just 1,135 carpenters and 215 plumbers came from overseas to Australia.
The Federal government has set itself the ambitious target of building 1.2 million well-located new homes over five years.
That’s an average of 240,000 homes a year.
But it seems we are currently only capable of building just over 60% of that amount each year.
Even the new Reserve Bank Governor Michele Bullock is sceptical that the Federal government’s housing target is achievable.
"We do have a bit of an issue in Australia with being able to build housing," she told the Australian Business Economists dinner in Sydney recently.
"Certainly the targets set by the government, it's great that they're focusing on it, but they're much higher targets than we've ever managed to hit before, so it's no easy answer."
Sure isn’t.
And that means one thing.
While demand continues to be strong, and the supply of homes continues to be restrained, house prices are certainly not going to be falling through the floor.
Quite the opposite, in fact.