“Brutal” RBA worsens housing shortage

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Australia’s housing shortage was already destined to worsen given the population is projected to balloon by 2.18 million people over the next five years via mass immigration at the same time as dwelling construction is falling:

Dwelling construction versus population change

The forward looking indicators for Australia’s housing construction are also disastrous, with overall dwelling approvals falling to a 13-year low in April:

Dwelling approvals
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The number of loans taken out to construct new homes also crashed to its lowest level on record in April, down around three-quarters from its January 2021 peak:

Housing construction loans

To make matters worse, Treasury Secretary Steven Kennedy told Senate Estimates last week that the decline in dwelling approvals is expected to last until 2025, with investment in new dwellings forecast to fall by 2.5% this year, 3.5% in 2023-24, and 1.5% in 2024-25.

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Tuesday’s 0.25% interest rate rise by the Reserve Bank of Australia (RBA) will only make the supply situation even worse.

RBA rate hiking cycles

Source: Shane Oliver (AMP Capital).

Stamford Capital’s annual survey of lending conditions in Australia’s commercial property sector shows that 72% of lenders now require a minimum interest cover ratio (ICR) of between one and two times interest, compared with just 45% in 2021.

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ICR is a fundamental lending indicator used by banks that refers to the amount of net income required by a borrower to repay monthly interest payments.

The mortgage broker’s latest survey was carried out in April, prior to the two most recent official interest rate rises.

Stamford has warned that the latest rate rise will heighten the risk that property developers will breach their lending covenants, describing the lending environment as “brutal”.

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Respondents to the survey included major banks, non-banks, family offices and private financiers.

“Alongside a higher number of developers and investors facing ICR breaches, the survey pointed to further reductions in investment and construction lending appetite”, The AFR reports.

“More than half (52%) of respondents expect major banks to decrease construction lending activity while almost two-thirds (59%) expect major banks to tighten construction credit criteria this year”.

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“Off-the-plan or pre-sales, which have become increasingly harder to generate, will also become more important to secure financing – only 18% of lenders surveyed by Stamford Capital are prepared to fund zero pre-sales this year, down from 30% who were prepared to fund zero presales in 2021 and 22% in 2022”.

“In addition, 15% of lenders plan to increase pre-sales requirements, well up on the 6% who planned to do this a year ago”, The AFR concludes.

The next chart says it all, with 52% of major banks seeking to reduce lending to construction projects:

Construction lending intentions

Remember, this survey was taking in April before the May and June rate hikes. Therefore, the situation has likely deteriorated further.

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Even Blind Freddy can see that expanding Australia’s population by 400,000 to 500,000 people per year while building fewer homes means the housing shortage will worsen, resulting in higher rents and increased homelessness.

If the Albanese Government genuinely cared about solving Australia’s housing shortage, it would run an immigration program that was significantly lower than the nation’s ability to supply new homes, not the other way around.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.