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The fundamentals remain strong
Inflation is rising with such intense demand levels, but we are still years away from the Reserve Bank increasing rates. When rates do rise, they will bring the HomeBuilder boom to an end.
Recent lockdowns will see confidence take a hit in the short term. However, previous lockdowns in Victoria show that economies bounce back quickly once they re-open. Households that don’t lose their primary income are ready to spend when the time comes.
The economy is also benefiting from a record volume of new detached homes commencements. As a consequence of more detached houses starting construction and fewer homes reaching completion, the volume of new detached homes under construction has expanded to a record number in all regions. This is partly due to materials and labour shortages delaying work.
Material matters
Renovations activity is also at record levels. The switch to working from home has motivated occupants to undertake renovations. Households are also spending money that typically would have been spent on overseas holidays and entertainment on improving their living spaces.
The elevated level of requirement for materials and the speed that it emerged has resulted in demand outstripping supply for key building inputs, including materials, labour and land. The delay in the supply of materials will see the impact on labour, and ancillary services remain elevated well into the second half of 2022. This is a positive for the broader economy as the economic stimulus is spread over more years but a challenge for building businesses.
Strong sales
New home sales were expected to decline following the end of HomeBuilder in March 2021, and they did. But despite the fall from record levels, sales have been stronger than anticipated, given the draw forward effect that HomeBuilder had on contract sales. Data shows that sales for the three months to the end of August are consistent with the average of recent years. This strength highlights the ongoing demand for new housing, particularly from buyers that may not have been eligible for HomeBuilder due to the price and income caps.
There are also encouraging signs that demand for multi-units is returning ahead of population growth. Commencements of multi-units in New South Wales returned to pre-pandemic levels in March 2021, while approvals have remained elevated. Approvals for units in Queensland have also improved from the pause in activity during 2020. Affordability constraints from solid house price growth will eventually make the apartment market a more attractive option.
The looming headwinds
Despite the strong outlook for the next 12 months, without a return of demand for new housing from overseas migration, there will be a decline in new home commencements over the next few years.
Population growth is one of the key drivers of demand for new homes. Traditionally, Australia has had relatively strong population growth, averaging 1.5 per cent a year since the turn of the century, with the majority of this growth coming from overseas migration. One year of net overseas migration would typically equate to demand for at least 100,000 new homes.
With our borders closed, Australia's population increased by only 0.1 per cent in 12 months to March 2021. This was the slowest rate since 1916. This disruption to Australia’s population growth is already evident in the multi-unit market as new migrants and students tend to favour non-detached housing in major metropolitan cities upon arrival in Australia. The disruption will see fewer homes built from 2022/23 than would have otherwise been the case before COVID-19.
Road to recovery
Closed borders and the risk of future lockdowns remain economic headwinds on the road to recovery. The next rise in the cash rate will also have a significant adverse impact on demand for detached housing.
Even with the expected return of population growth, the current volume of new home commencements will not be sustained. A decline in commencements of new detached homes should be anticipated from mid-2022 when homes initiated by HomeBuilder near completion.
From mid-2022, adverse impacts will emerge from two years of low population growth, higher building costs and a shadow of demand created by HomeBuilder. This will impair the detached dwelling sector, with the number of starts falling back below the past decade’s average. This is expected to be compounded by a rise in interest rates from mid-2023.
On the other hand, multi-unit construction is expected to reach a trough in the 2021/22 financial year before returning to growth.
For more information on economic and housing trends, visit the Economics hub.