The pressure of a boom
Ongoing restrictions on overseas travel is leaving more money in households’ pockets, for not just new homes, but for renovations. In the past six months alone, there have been $5.9 billion of alterations and additions approved across Australia, up from $4.2 billion in the equivalent six months to April 2020.
Skills and materials shortages are the consequence of such a boom, both at home and around the world. HIA’s Trades Report recorded the biggest trade deficit nationally since 2004, especially acute outside of Sydney and Melbourne. By trade, the steepest shortages are in bricklaying, ceramic tiling, roofing and carpentry. Prices are also starting to jump, especially in site preparation and roofing.
There have also been spikes in timber and shipping prices on the back of surging international demand for housing and renovations, combined with growing delays in delivery of key materials and products.
We expect these constraints to be addressed by both a supply and demand response, which will take time. Towards the end of the year and into 2022, international supply chains will respond and demand for housing will start to slow.
Will interest rates rise?
Australia’s recovery is ahead of schedule. This may bring forward interest rate increases that will weigh even further on the housing industry.
GDP jumped a further 1.8 per cent in the first quarter of 2021 driven by, among other things, activity in the housing and renovations sectors. The Australian economy is bigger now than it was before the pandemic, by +0.8 per cent. This is no small feat – there are only a few countries that have achieved this goal.
Australians also saved an enormous amount of money over the past year – an additional $130 billion more than usual. As confidence returns, households can use these savings to offset speed bumps such as an interest rate rise. The broader fallout should, therefore, be more limited.
In addition to recovering to its pre-pandemic level, the RBA is forecasting Australia to keep advancing. Australian GDP is still 2.1 per cent below its pre-pandemic trajectory, and the RBA expects us to close this gap by the end of next year, 2022. The Australian economy’s recovery has been consistently stronger than RBA forecasts.