Housing shortage to worsen as property prices gain momentum

Growth in house prices in Australian capital cities could accelerate in the second half of 2024 and in 2025, with the housing shortage likely to worsen as population growth feeds demand for housing and supply not keeping up, underpinning further gains in property prices and rents.

The probability of price rises for houses and units is high in Melbourne, Sydney and Brisbane as housing moves further into undersupply over the next 24 months.

Research conducted by Performance Property for Capspace reveals the extent of the ongoing housing shortage, with evidence of supply chain problems and the high cost of construction limiting the creation of new housing, meaning the unit and housing markets continues to be in an undersupplied position.

Performance Property's analysis reveals that building approvals are simply not keeping up with population increases.

Overseas skilled migration particularly is likely to help push demand for housing higher. Over the past 12 months, 303,000 skilled migrants moved to Australia, yet as of March 2024, national dwelling approvals sat at just 162,640 for houses and units; that is not enough to keep up with demand.

That has led to strong rental growth across the country, with the current national vacancy rate sitting below 2% due to tight supply.

The chart below from the Australian Bureau of Statistics (ABS) indicates a concerning downturn in dwelling constructions approved since March 2021.

The ABS notes that higher construction costs continue to weigh on dwelling approvals.

Ongoing population growth will put further pressure on rental markets nationally.

Evidence of further increases to net interstate migration for Queensland and Western Australia are positive and that could make an argument for investors to get more exposure to these capital cities for further diversification.

Apart from migration, investor demand for housing is also rising, despite higher interest rates, and that is adding to upward pressure on property prices. The value of investor home loans rose 3.8% in March to $10.2 billion, increasing a whopping 31% from March 2023.

In contrast, owner-occupier loans (excluding first home buyers) rose 9% through the year while first home buyer loans rose 18% from a year earlier, ABS data show.

Since March 2023, there has been relatively strong growth in investor loans, with increases in both the number, by around 11%, and the average loan size, up around 8%, in original terms. This aligns with historically low vacancy rates over the same period, and CPI rental prices rising 7.8% annually to March quarter 2024, according to the ABS.

Need to diversify wealth base

While property owners have benefited from price rises, investors should consider diversifying their portfolios into other assets.

Recently released economic data, ABS Household wealth data, shows household net wealth sat at a record $15.50 trillion in the December 2023 quarter, boosted by a record level of property assets of $10.50 trillion as at December 31, 2023.

As a proportion of net household wealth, residential property accounted for around 64.5%, up from 61.7% in December 2020.

Households also held $1.35 trillion directly in equities, $1.67 trillion in cash and deposits, and $3.59 trillion in superannuation.

Yet the key driver of household wealth gains in recent years has been rising property prices.

With such a large proportion of individual wealth tied up in property, it makes sense for investors to diversify into other asset classes, particularly those from which they can draw an income, such as investments in fixed income assets, to reap more attractive income yields.

Ultimately, it is income-yielding assets that will support investors in everyday living and in retirement.

So other investment strategies should consider diversification into fixed interest, including private credit, which can deliver investors yields close to 10% per annum.

Private credit, or non-bank loans, offer investors a relatively attractive income stream and capital protection through stringent loan process, along with the security taken over borrower assets.

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