How the pandemic turned the tables on property supply vs. demand in Australia

01 March, 2024: We've heard it a thousand times - it's all about supply and demand! Well it turns out, the pandemic completely flipped the relationship.

Source: (1) ABS estimated residential population divided by the expected average number of people in the household (which has been constant at 2.6 since early 2000s per census data). (2) ABS estimated dwelling stock which is only available from July 2016 and has been forecasted from July 2022 using ABS building approvals.

Before lockdowns, net new dwellings outpaced new households by 50k p.a., adding incremental supply into the Australian property market.

After lockdowns, this relationship flipped and now net new households exceed new dwellings by 90k p.a., taking out a big chunk of supply from the Australian property market. The effect can be felt in rental costs and property prices growing counter to interest rate movements.

Source: Summary of above table.

Most people will be quick to point out that 225k new households p.a. is a temporary increase to account for the reduction in migration during lockdowns.

However, even if the number of net new households falls to pre-lockdown levels of 145k p.a., it is still 10k higher than the new dwellings being added at present. Net new dwellings has fallen from 195k p.a. to 135k, which is a worrisome trend.

Building activity has suffered due to inflation in raw materials and rising interest rates, which have increased the costs of development financing. Additionally, these challenges are being compounded by builders going out of business from these effects.

The number of construction or renovation approvals in 2023 was 162k according to the ABS, which is the lowest level since 2012 (157k), and this is a metric that is meant to be indexed to population growth.

The saving grace is that construction approvals are typically cyclical, moving in 5-6 year waves. However, it does set the stage for sharper property market growth in the medium term - even if interest rates show no signs of loosening.

The reality is that jumpstarting construction, which is key to boosting new dwelling numbers, likely relies on an impetus (e.g., falling interest rates, wage growth, tax concessions etc.) that inflates, not deflates, property prices. This presents the dilemma which is usual for Australian property: the desirable levers that can make property more affordable could also make it less affordable.

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