The next houses shortage will not boost rents or prices

Instead, it will lower living standards.

With dwelling construction crashing, and population growth remaining turbo-charged on the back of never-ending mass immigration, pundits are now tipping that Australia’s housing market will soon shift back into chronic shortage:

“CBA estimates suggest an undersupply of apartments from 2020,” CBA economist Kristina Clifton said…

Ms Clifton said an undersupply of housing could put downward pressure on vacancy rates and further upward pressure on rents and dwelling prices…

Mirvac chief executive Susan Lloyd-Hurwitz… [said] “Very soon we are going to be in a supply shortage situation,” she said.

The chief executive of Australia’s biggest developer, Stockland’s Mark Steinert, agreed. “We need 180,000 dwellings a year to keep up with demand, and it’s not going to happen”…

Reserve Bank governor Philip Lowe has also warned of how a supply shortage could see a rebound in prices…

“It seems to me quite possible that we could have a period now of rising housing prices, because construction activity is slowing while the population is still rising quite quickly. So there are some underlying drivers of housing prices,” Dr Lowe said…

Frank Gelber from BIS Oxford Economics is still tipping heavy falls in dwelling construction:

Residential building commencements have further to fall. After a slow start to the downturn, commencements fell by 15 per cent last financial year, with the fall accelerating through the year. BIS Oxford Economics forecasts suggest they’ll fall by another 20 per cent this year.

And building work done has a lot further to fall as current projects are completed and not replaced. The long lead times in residential projects, particularly high-rise, mean that work done on residential building has hardly begun to fall. I expect work done to fall by a quarter in real terms across the next few years, with a corresponding substantial negative impact on the economy.

Residential building won’t rebound. It’s just turning down and the downturn has a lot further to run.

As has RBA deputy governor, Guy Debelle:

“2020 looks like being the low year for the residential construction sector. We can see through the trough to the other side”…

“While the increase in supply has finally met the earlier increase in demand, demand will continue to grow given population growth but supply is going to decline. So there is quite likely to be a shortfall again in the foreseeable future”…

“The growth in demand without a meaningful supply response will lead to a larger price response.”

Indeed, both dwelling approvals and commencements have collapsed, meaning that dwelling supply will fall sharply over the next two years at least:

Escalating concerns over apartment quality, alongside growing developer bankruptcies, will also prevent construction from rebounding. Thus, we are looking at a protracted construction downturn.

That said, just because Australia’s housing market is headed into structural undersupply doesn’t automatically mean escalating prices and rents.

Household income growth remains stillborn, whereas unemployment is also set to rise (owing partly to the construction jobs bust).

Households are carrying gigantic debt loads at the same time mortgage rates are approaching their structural bottom.

A more likely scenario is that household formation will slow as more Australians hunker down together (e.g. youngsters will live with mum and dad for longer or in group homes).

In turn, the slowing housing supply will be met by slowing demand, thereby limiting any rent / price increases.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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