At the end of last year, the housing market seemed to show signs of beginning to slow down as some downward pressures on prices emerged. Higher interest rates would usually suggest a decrease in house prices. However, new data released by CoreLogic shows that the Home Value Index is still on the rise, with a 0.6% increase last month. While some of the recent recovery in prices is driven by expectations of interest rate cuts later in the year, the key factor for rising house prices is chronic undersupply.
Put simply, the root of Australia’s housing crisis is that supply is failing to keep up with rising demand. Demand has escalated in line with strong population growth driven by record high net overseas arrivals through 2023. Recent growth in housing commencements has failed to keep up with this population growth, let alone start to address the structural undersupply. The Federal Government’s target of building 1.2 million new homes over the next five years is ambitious, particularly given any increase in the pace of construction is off to a slow start as builders grind through a backlog of projects.
That backlog partly explains recent low levels of dwelling commencements. As the construction industry works through existing projects, there is less capacity to start new builds. This backlog of construction work stems from pandemic-era challenges. Due to lockdowns, worksite access was limited, hindering progress on both residential and non-residential construction projects. Emerging from the pandemic, higher material prices, higher wages and shortages of labour have continued to weigh on the level of construction activity. These setbacks have only been exacerbated by insolvencies in the construction industry, which has left some homes only partially built and in need of new contractors.
The backlog of construction projects appears to have peaked, but the issue remains a key constraint. Over the past two years, on average almost 103,000 houses have been under construction at any one time. That is more than two thirds higher than the average seen over the decade prior to the pandemic, as shown in Chart 1. This is not a good news story, but an example of the blockage that is preventing a faster upswing in housing supply.
Chart 1: Dwellings under construction
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