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How Did Australia End Up In This Housing Undersupply?

How Did Australia End Up In This Housing Undersupply?
April 1, 2021 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Most of life’s biggest dreams revolve around real estate. The dream to accommodate a bigger family, the dream to upgrade to a nicer home, the dream to buy that first home, the dream to invest in one’s future, or moving town to pursue a lifestyle or career dream.

But not now. Australian real estate is locked-up. Frozen!

There are currently two (2) separate seriously important issues. In both cases, Australian real estate has never before experienced worse conditions than right now:

  1. Grossly insufficient national rental stock to accommodate the 35 percent of Australians who choose to rent (Sydney and Melbourne are the exception to the rest of Australia); and
  2. Of the 65 percent of Australians who live in owner-occupied accommodation, there is a horrible mobility crisis for anyone with aspirations to move. For several years, the volume of properties listed for sale right across Australia has reduced to such a small volume that the system is now gridlocked.

It is not as if Australia has a problem with housing construction or that our population has suddenly boomed. The opposite is true.

To understand things, one must keep in mind that most people do not stay living in the same property all of their life. Regardless of population growth, one’s life circumstances change from time to time, prompting people look to upgrade, downsize or move town.

One’s home is one’s castle, unless one no longer wants to live there. For those in that situation right now, it is one’s ‘prison’. Thou shalt not leave even if thou wants to. Australia has a mobility crisis, and it is not a COVID creation.

Actions leave footprints!

Over the last 6-years, the actions of APRA (the government department chartered with the responsibility of regulating the behaviour of banks), the incumbent Liberal government and the opposition Labor government all have played a role in locking up Australian real estate.

The root cause of today’s mess stems from ill-informed policy decisions between 2013 and 2017 that were made as a reaction to Sydney and Melbourne’s last property boom.

Back then, those two cities had strong property markets and high confidence in their respective local economies but most of the rest of Australia had soft conditions.

Nonetheless, a series of new (national) policies were introduced without regard for the huge disparity from one location to the next in respect to the cost of housing, the level of activity from each buyer demographic (owner-occupier, investor, etc), the size of the national rental pool, the new construction supply pipeline and the strength (or fragility) of local economies.

The graphic below is a stark reminder of the avalanche of policy changes that progressively squeezed the confidence out of homeowners and property investors. The trendline associated with the series of events in this graphic is compelling proof for how we ended up in this current mess.

Nasty set of numbers

Over the last 15-years, the extra 958,000 dwellings added to the national housing stock is more than enough for the 1,871,000 increase in the national population.

But with a heap more people and a truckload of extra dwellings, the volume of real estate transaction in recent years is 16 percent lower than 15-years ago.

Australia’s annual real estate transactions have been on a progressive downward trend from circa 500,000 15-years ago to 420,000 in the years directly before the arrival of COVID-19. You are right if you think that does not make sense!

Australia typically adds 180,000 extra dwellings to its national housing stock each year and total stock currently sits at 10.6 million.

There are 82,350 fewer dwellings listed for sale today than 9-years ago even though Australia’s total dwelling stock is 1.5 million greater. Houston, this is your problem – insufficient sales listings, as opposed to insufficient total dwelling stock!

This year, as with every year, plenty of people want to buy real estate, but the record low volume of dwellings listed for sale is underpinning the intense upward pressure on asset values all over Australia.

Do not blame the germ, national listing volumes have been on a sharp decline for 6-years and were already very low before COVID-19 arrived. Here’s the proof!

The cupboard is bare!

Propertyology’s analysis of historical evidence suggests that a property market which has between 3.25 percent and 3.75 percent of total dwelling stock listed for sale is quite healthy.

Nationally, Australian real estate has not been healthy for 5-years. And the current record low 2.4 percent is akin to an emergency ward. The dreams of tens of thousands of Aussies are being squashed because of it.

Currently, there is an all-time record low volume of dwellings listed for sale in Hobart, while Adelaide, Brisbane and Canberra are also fast approaching record lows.

The resale undersupply pressures are even greater in dozens of regional locations (big and small) right across Australia. Just some of the regional locations currently with all-time record low resale supply include Bendigo, Coffs Harbour, Dubbo, Kempsey, Launceston, Mount Gambier, Rockhampton, Shepparton and Warrnambool.

The problem is widespread!

Let us not forget that overseas migration (which typically contributes 220,000 to Australia’s population growth each year) was ground to a halt 12-months ago.

Meanwhile, construction of new dwellings (typically adding 180,000 to national stock levels per year) has continued – in fact, with initiatives such as HomeBuilder, it is accelerating.

Not an Australia to be proud of!

Australia’s rental supply is even worse than resale supply. The anecdotal reports of families all over Australia with incomes but cannot find rental accommodation is not an Australia to be proud of.

One in three dwellings in Australia are rented. 98 percent of Australia’s rental stock is supplied by everyday Aussie property investors.

It will always be that way – governments can barely afford to fund essential infrastructure; it will never be their role to fund rental supply.

Investing in residential real estate is a discretionary action which approximately 2.3 million Australians have already pursued, thereby supplying almost all of Australia’s current 3.5 million rented dwellings.

One cannot expect investor participation (rental supply) to keep pace with rental demand when:

  1. APRA’s overzealous credit policy results in investment loan applications from thousands of responsible borrowers being declined,
  2. banks are charging investors a 1-percent higher interest rate than owner-occupiers,
  3. the federal government removes legitimate (depreciation) tax deductions,
  4. Australia’s last two federal elections centred around scrapping negative gearing,
  5. Some state governments are charging investors higher stamp duties than owner-occupiers, and
  6. recent changes to state-based rental legislation means that investors no longer have the right to say ‘yes’ or ‘no’ for something that they own.

With the total value of home loans to purchase residential investment dwellings in recent years being the same as 18-years ago (when the population was smaller and property prices were lower), it is no wonder that Australia currently has an enormous rental crisis.

A healthy rental market typically has a residential vacancy rate of between 2 and 3 percent. Anything below 1.5 percent is seriously unhealthy.

Research conducted by Propertyology confirms that, as at the end of February 2021, 136 out of Australia’s 150 biggest towns and cities are officially in rental crisis (their vacancy rate is below 1.5 percent). Thanks APRA!

Only a narrow-minded simpleton could seriously think that tightening credit policy would be anything other than detrimental to all this.

Anyone currently looking to find rental accommodation and are fortunate enough to win the bidding battle are paying a hefty premium because Australia’s pool of rental accommodation is grossly undersupplied.

The numbers in this chart is proof of the single biggest and most widespread rental crisis in Australia’s 230-year history and it has nothing to do with COVID-19.

Decisions lead to actions and actions leave footprints. Australian real estate is locked-up because of past decisions by a collection of government departments.

Today’s record low rental supply in locations all over Australia (exc Sydney and Melbourne) is a consequence of 6-years of consistently squeezing those who fund the nation’s rental accommodation.

Similarly, today’s mobility crisis is a consequence of the same series of events. Persistent squeezing reduced homeowner’s desire to transact in real estate, while tighter credit policies reduced the ability of those prepared to participate.

If those who own the assets are not afforded an environment that provides confidence, they will not list their existing asset for sale. Instead of a regular grease and oil change, grit has been added to the system. It is now locked-up!

Now, for the first time in well over a decade, a big critical mass of people from locations all over Australia have aspirations to move home (either to somewhere else within their hometown or to completely relocate to another town). But they are presented with no housing stock to buy.

Now what?

The people in high places who, a few years ago, pulled the wrong reins in response to rising property prices in two cities, did so by introducing policies that created other problems.

The risk of unintended consequences will always be very high when all stakeholders that may be influenced by key decisions are not present at the boardroom table.

There is no quick fix for today’s mess, but we must ensure we do not make it worse. Below are my recommendations to those people in high places:

  1. The single most important issue in Australia right now is the horrendous undersupply of rental accommodation. It will take some time to correct itself, but the only viable solution is to reduce barriers of entry for the everyday Aussie property investors who generate the rental supply.
  2. The much-needed WD40 to enable households to move freely again is to stop introducing policies that block the system, to restore stability and public confidence, and to announce to the Australian people that they need not fear APRA again pulling the rug out from borrowers like they did a couple of years ago. Start removing blockages as opposed to adding more friction to a locked-up system.
  3. Significantly improve credit application efficiencies. With modern technology, there must be no excuse for banks not being able to assess and approve a borrower’s application for credit within hours of receiving it [refer here].
  4. Real estate was used as a political football for the last two federal elections. The continuous policy changes plus intense speculation surrounding other proposed changes creates considerable uncertainty, thereby discouraging property owners from listing real estate for sale. Both sides of government must commit to keeping real estate out of all debates for the next federal election; focus on Australia’s recovery from the pandemic and shut your cake-hole on all real estate matters!
  5. Provide first-time property buyers with a fair and predictable framework that includes a long-term commitment from state governments for a stamp duty exemption on the first $400,000 of a property plus a one-off grant of (say) $20,000 towards the purchase of one property. Governments must stop trying to incentivise vulnerable people into buying brand new dwellings (often built with poor quality controls) and instead provide the aforementioned support for whatever property best suits each buyer’s needs, whether it be new or established, owner-occupied or rent-vested.
  6. Promptly increase the RBA cash rate by 0.5 percent and then completely leave it alone until such time that wages are growing by more than 3 percent per annum.
  7. Remove the premium that property investors are currently charged on investment home loans (currently a loading of circa 1 percent).

Former Prime Minister Paul Keating once said “…it was the recession we had to have.” I say that Australia is currently in the early stages of a widespread property boom that it must have!

To address past poor decisions in a sustainable way, we must ensure that the right reins are pulled. Otherwise, God help us!

Spasmodic policy constraints, stimulus packages and incentives that occur from time to time are indicative of desperate acts to either accelerate or decelerate housing and the economy. A truly efficient system would rarely need to do that.

Property booms create a heck of a lot more good than bad. The absolute worst thing that people in high places could do right now is to respond to this national property boom in a similar way to the Sydney-Melbourne boom of several years ago. APRA’s clamp around credit supply is the main reason that we are in this mess today.

About the Author

Simon Pressley is founder and managing director of Propertyology, a national property market research firm and Hall of Fame Inductee of Real Estate Institute of Australia.

Since before the GFC, Simon spends each day analysing the fundamentals of the property markets of every capital city and every regional location throughout Australia. Having studied Australian real estate history to the nth degree, Simon has an intimate understanding of the complexities of property markets, the machinations of the numerous inputs, and the knock-on effect that human actions have on property markets. There is no university degree or training course which teaches these things.

When, during the onset of COVID-19, every single bank and a big bunch of economists were predicting the biggest downturn in Australian real estate history, Simon was the only person in Australia to correctly predict that property markets would actually boom and that it would only take a few months for that to occur. The below graphic contains a visual summary of some of Simon’s other thought-leading forecasts.

Immediately prior to analysing national property markets full time, Simon gained invaluable experience at the real estate transaction level as a buyer’s agent. With the skills and appropriate licences to operate in five (5) different states, Simon was recognised as Australia’s Buyer’s Agent of the Year in three (3) consecutive years and subsequently inducted into the Real Estate Institute of Australia Hall of Fame.

Simon has recruited, trained and developed a team of buyer’s agents that have helped everyday Aussies to invest in real estate in eighteen (18) individual cities and towns across Australia.

An elite decision-maker, Simon is a graduate of Australian Institute Company of Directors and former elite-level AFL Umpire.

Prior to pursuing a career in real estate, Simon gained valuable knowledge about banking, finance and credit. A 10-year career with Commonwealth Bank of Australia included roles in assessing credit applications, a broad appreciation for commerce, and understanding the consequences of borrowers defaulting on credit.

Subsequent to CBA, Simon owned and operated a mortgage broking business. In 2004, Simon was awarded Australian Mortgage Broker of the Year Award.

Simon has tertiary qualifications which include property investment advisory, financial planning and housing finance.

Called upon most days by different segments of the media, Simon’s objective and often very direct commentary on property market matters are featured in print, radio and television. He is also happy to consider requests for being a keynote speaker at events.