A temporary improvement in housing affordability could evaporate if Covid-19 vaccines allow resumption of normal migration levels, Australia’s peak housing body has warned.
In its first major report, released on Tuesday, the National Housing Finance and Investment Corporation (NHFIC) has projected new housing supply will exceed demand for two years before a demand rebound in 2023.
In total, demand for housing will fall by 286,000 dwellings between 2020 and 2025, with the biggest savings from less competition expected for renters in Sydney and Melbourne and those looking to buy apartments.
With borders closed subject to limited exceptions since March, Australia has experienced an “unprecedented shock to population growth”, the report said.
But fears of a major hit to house prices have not eventuated due to interest rate cuts, government fiscal stimulus including homebuilder grants, and “pent up demand in jurisdictions that have successfully contained the virus”.
The report said with new supply exceeding demand by 127,000 dwellings in 2021 and 68,000 dwellings in 2022, the Australian market will experience a “partial catch-up for much longer [than] more protracted periods of undersupply” earlier in the 2000s.
The rental market has experienced the biggest drop in demand, particularly due to “lower demand from international students” and low interest rates encouraging renters to buy.
“First-home buyers have been taking advantage of the recent softness in dwelling prices, low interest rates and government stimulus, accounting for more than 40% of total new housing loans – 10% higher than the long-term average.”
Detached housing is experiencing a construction boom in response to fiscal and monetary stimulus, with the number of new houses set to rise from 90,000 in 2020 to 108,000 in 2021, while construction of apartments will fall from 55,000 units in 2020 to 45,000 in 2021.
Despite lower rents in Sydney and Melbourne, the NHFIC noted that the impact of Covid-19 “is disproportionately affecting industries where employees are more likely to be renting”. For those households experiencing job cuts or a reduction in hours, affordability will not improve.
The NHFIC warned that affordability will worsen from 2023, particularly “if supply is not responsive to the strong rebound in demand”.
For example, new housing supply could be “lower than projected if developers face greater difficulties in obtaining the level of pre-sales necessary to obtain project finance for new medium-to-high-density developments”.
The NHFIC called for a policy reset to ensure that “planning policies can accommodate future population growth without adverse consequences for affordability” by reducing barriers to development, allowing supply to respond to demand.
The NHFIC warned its analysis is sensitive to assumptions about population growth.
“If vaccines are forthcoming earlier than expected, resulting in international borders opening sooner and more Australians returning home, together with potential supply constraints, we would anticipate any cumulative excess supply over a medium-to-longer-term horizon to be negligible,” it said.
The NHFIC noted that in the September quarter Melbourne dwelling prices fell 3.3% and in Sydney by 1.6%, while regional centres like Dubbo and Noosa experienced price rises of 8.7% and 6.4% over six months.
But the report said it was also too early to say whether trends induced by Covid-19, such as the increased incidence of working from home and a shift from inner-city living to regional centres, will last.
“If these work arrangements become more permanent, the gap between housing affordability in the capital cities and the regions may narrow.”
Increased working from home could result in a preference for home offices and a need to decentralise urban infrastructure towards the urban fringe, it said.
The NHFIC projected a strong increase to 2025 in the number of lone households with residents aged 70 and above (+23%), and couples without children (+9%).