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$vuetify.icons.faPhone1300 650 620

Perfect storm

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While low interest rates and HomeBuilder activity will support the industry in the short term, the skills and material shortage that has emerged has the industry wondering what will take place in the future.

Thomas Devitt

Economist

Recent data is consistent with our expectation for a record number of detached houses being built in the year ahead. This is driven by HomeBuilder, record low interest rates, surging house prices and the transition of metropolitan residents into detached housing, especially in the regions. 

The latest data shows detached house building approvals reached a new high in April. More than 80,000 building approvals for detached houses have been recorded in the past six months, almost 30,000 more than the equivalent six months to April 2020. The value of renovations approvals, recorded $10.5 billion in the past year, compared to $8.5 billion in the previous year. 

Lending indicators, while coming off recent highs, remain elevated. Loans for the construction of new homes in the past 10 months have doubled compared to the equivalent period a year ago, up from 36,000 to 72,000. 

First home buyers drove the market for almost a year. Recently, investors have made a comeback. In May 2020, the value of investor loans reached a $4.2 billion trough – the lowest level in over 17 years. Since then it has almost doubled to $8.1 billion – its highest level since 2017, the tail end of the previous boom. The simultaneous return of other owner-occupiers suggests good underlying momentum outside of HomeBuilder. 

Recently, investors have made a comeback. In May 2020, the value of investor loans reached a $4.2 billion trough – the lowest level in over 17 years. Since then it has almost doubled to $8.1 billion – its highest level since 2017, the tail end of the previous boom.

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. 
 

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.

Waiting for overseas migration
Australia’s unemployment rate has also fallen much faster than the RBA anticipated over the past year. The RBA expects that we have, by now, virtually returned to pre-pandemic levels of unemployment, marginally above five per cent. This rate is forecast to continue falling to 4.25 per cent by the end of next year. The momentum shown thus far is believed to have been more than enough to absorb the loss of JobKeeper. 

The irony is that this much faster-than-expected recovery in the economy and the labour market may challenge the RBA’s claim that they won’t raise interest rates until ‘2024 at the earliest’. The RBA’s recent announcements are already flagging an eventual ‘tapering’ in their bond purchases. Interest rates increasing sooner rather than later will be an unwanted headwind for the housing industry at a time of already depressed conditions. 

The big risk to the outlook remains the return of overseas migration. This depends on the timing of the next federal election, which in turn is linked to the success of vaccinations. This leaves a significant upside and downside risk for the housing industry in the next two to five years.