In August this year, the National Cabinet agreed to build 1.2 million new homes over the course of five years from mid-2024 until mid-2029. The key reason the government has embarked on such an ambitious project is to try to address the deepening housing crisis in Australia, which seems to be worsening day by day. Renters and buyers are facing severe challenges due to limited housing availability and soaring prices, on top of which, record immigration is adding significant pressure.
Each of these indicators suggests an economic environment where house prices may stretch beyond the reach of the vast majority of Australians. Consequently, it is understandable that the government is seeking to take urgent action to remedy this disturbing prospect.
Let’s unpack the latest figures for you and provide an estimate and evaluation of how many dwellings might actually be feasible and what the implications of that level of construction will be for the broader Australian property market.
To achieve the National Cabinet's goal by mid-2029, the annual target is to build at least 240,000 new homes from July 2024. The $10B Housing Australia Future Fund, along with the $5B Housing Support Program, the $3B New Home Bonus, and the $2B Social Housing Accelerator Fund add up to over $20 billion of Commonwealth funding pledged towards this endeavour. All states and territories have jumped on board with a combined total of $13 billion in funding.
These programs are geared towards enhancing housing supply and fortifying the construction industry, amidst rising inflation that the RBA is grappling to manage. The urgency of the situation was underscored in August when ASIC revealed that 308 Australian construction companies either went into administration or had a controller assigned, marking the highest monthly figure in more than ten years.
Despite the good intentions behind these targets, achieving them may be logistically challenging. Harry Ottley, CBA Economist, sheds light on the current state of the housing industry, stating, "The level of commencements in the June quarter is the lowest in a decade and near record lows on a per-capita basis." Ottley also expresses scepticism about potential solutions, asserting, "Even if policies designed to boost supply (such as zoning reform, tax changes or grants) are delivered, it remains unclear if the Australian construction industry has the capacity to build dwellings at this rate given current circumstances."
Tom Forrest, the CEO of Urban Taskforce Australia, highlighted concerns based on ABS data, indicating a downturn in planning approvals. He asserted that a significant overhaul in planning policy and practices is imperative to reverse this trend. Furthermore, Forrest stressed the importance of providing incentives to the private sector to ensure they meet the necessary housing supply demands.
A significant obstacle for developers appears to be inflationary pressure. To secure financing for extensive construction projects, developers require presales. However, the prices at which they can sell properties in the current market are insufficient to cover construction costs, especially when adopting a risk-averse approach and considering the potential impact of inflation on materials and labour expenses. According to ASIC reports, numerous developers are going out of business because they have been unable to generate profits, given that their costs have escalated significantly due to inflation.
This raises the difficult question. Where will these new properties come from? If developers are really feeling the pinch and fewer and fewer of them are wanting to take on the risks to meet Australia's housing supply problem How will the government solve this? Currently there seems to be no solution.
Recent data from ABS highlights the challenges. The number of dwellings approved in September 2023 have declined by 17.4% from a year ago. The renovation boom, amplified during the pandemic, is also starting to fade. With both seasonally adjusted and trend approvals nearing decade lows, the outlook for new home approvals remains uncertain.
Current data from the ABS indicate that as many as 100,230 dwellings are undersupplied in 2023. The effect on the housing market is clear and obvious. Rents across Australia have surged at the fastest rate in at least 15 years, with annual rent increases surpassing 10% in late 2022 and early 2023.
The proportion of household income spent on housing is currently much higher than in previous years, and experts have identified several factors driving these rent increases, including shortages in building materials, a lack of affordable housing, and a surge in migration.
Moreover, dwelling completions now takes longer than before, especially for houses and townhouses. Regulations and a shortage of skilled workers have slowed down the construction process. This delay not only affects the property market but also makes it harder to meet the growing demand for homes.
Deloitte's recent analysis on the national construction target emphasises that the Commonwealth Government's target of 1.2 million new homes by 2029 is a tall order. Deloitte's projections suggest housing completions of around 188,000 in 2024 and 184,000 in 2025. This falls significantly short of the 240,000 dwellings per year envisioned by the Commonwealth target. The report underscores that to meet this target, completions would need to reach unprecedented levels, consistently surpassing any quarter this century. Additionally, Deloitte's analysis indicates that the target might need to be extended beyond 2029 to ensure the total number of homes are delivered. The study highlights that with changing household compositions, increasing space needs for home offices, and rebounding migration levels, the demand for dwellings could potentially exceed current expectations.
The State of the Nation’s Housing Report has critically evaluated the national housing target, revealing a looming gap between housing supply and demand. Over the five years leading up to 2027, there's an anticipated shortfall of 106,300 dwellings and a deficit of 62,300 apartments and medium-density dwellings. This analysis isn't isolated; various industry experts and government bodies have expressed similar concerns.
The overarching consensus suggests that while the target is commendable, its realisation demands more than just financial investment; it calls for a strategic overhaul of the current housing ecosystem.
As the government grapples with the monumental task of meeting its housing construction target, investors might find a silver lining.
The National Cabinet's objective is faced with various challenges, including the undersupply situation and the need for rapid construction. Recent indicators, as discussed above, reveal the magnitude of the task at hand. It is important to acknowledge that immediate and significant action is required to mitigate the worsening housing crisis.
The prevailing equation is simple: there is a significant discrepancy between housing supply and demand, resulting in a housing crisis. However, it is not surprising that experienced investors perceive this as an exceptional opportunity. Housing shortage means that the demand will push upward pressure on both housing prices and weekly rents. Buyers would have to pay for higher prices and tenants will be lining up and pay higher rents to secure a property. Investors will have the chance of enjoying solid investment returns.
In summary, although the housing crisis poses challenges, it also presents a unique opportunity for seasoned investors. The current housing supply-demand gap offers the chance to investors for reaping the rewards of sound investment decisions.
It's clear that reaching the target isn't merely about financial investment; it necessitates a comprehensive rethinking of Australia's housing strategy. The path forward is uncertain, and while the government's potential shortfall could spell opportunity for investors, it remains to be seen if a collaborative approach can address the growing disparity between housing availability and need.
By embracing the challenges and strategically navigating through them, investors can capitalize on the potential for favorable returns in the market. It is a time where investors can make a meaningful impact while seizing the advantages presented by the current housing dynamics.