Without drastic change to boost housing, Australia is headed for a decade-low supply that will push prices higher and worsen the current affordability crisis, according to a new report by the Urban Development Institute of Australia (UDIA).
The UDIA State of the Land 2024 report, compiled alongside prop-tech firms CoreLogic, Research4, and Charter Keck Cramer, paints a concerning picture of a housing market teetering on a sustained supply shortage.
This sits in stark contrast with the ambitions of the government, which has launched several initiatives designed to boost new housing stock.
“Despite the crucial efforts on the Housing Australia Future Fund (HAFF), the National Housing Accord target of 1.2 million houses, and numerous supply initiatives, the government is not yet effectively impacting key fault lines in the market; front end problems with land supply, zoned land, skilled labour, infrastructure, and planning or environmental approvals,” said UDIA national president Col Dutton (pictured above left).
“This report is the clear evidence that government needs more focus on boosting development ready land supply if it is to have any hope of achieving its ambition to permanently ease housing affordability and improve dwelling delivery.”
Australia’s housing crisis has been a long time coming.
Across the past two decades, Australia has significantly underdelivered new housing supply across the nation, according to the report.
This undersupply has underpinned the ongoing erosion of housing affordability, driving down homeownership rates and increasing household debt.
When pandemic-era interest rates dropped to record lows in 2020-21, housing values peaked with double-digit growth across most regions, pushing homeownership further out of reach for many.
Since the 2022 election, the government has initiated 14 separate housing and supply measures. However, the initiatives’ influence has so far been muted.
This is largely because the Housing Australia Future Fund (HAFF) and National Housing Accord aim to build around 40,000 of the 1.2 million homes as affordable and social dwellings.
This means the vast majority (97%) of the 1.2 million target relies on private development and delivery across the entire housing spectrum.
The private sector, due to multiple factors, struggled to keep pace with this target.
Firstly, national residential annual lot releases decreased by 26% in 2023. With a total of 36,500 lots released, this was the lowest volume released since 2012 and a startling 56% decline on the volume released in 2021.
Meanwhile, the national new build multi-unit market experienced another soft year of activity with aggregate settled sales down 2% to total 19,289, which is down 50% on the decade average.
And the emerging build-to-rent (BTR) sector has barely gotten off the ground with only 790 builds in 2023, down 65% from the year before.
CoreLogic data found the lack of supply continued the trend of pushing national housing values back up having made a full recovery over the past 12 months.
“The structural issues in the market continue to dog the industry with material costs remaining well above historical averages impacting viability, labour shortages constraining build capacity and a lack of development ready land,” said Dutton.
Even though the housing market is facing these significant challenges, the industry has been working hard to overcome them.
Brad Walters (pictured above right), head of product and rating services at credit bureau Equifax, said it was encouraging to see resilient industry players step up to fight against the shortage and maintain high quality builds.
Referencing several examples, Walters pointed to how some insurers are now offering first-resort latent defects insurance on apartment buildings.
“Regulators have also increased their inspections and surveillance programs, and the early results in NSW are positive,” he said. “Prospective buyers are performing more due diligence than in the past, seeking independent ratings on the reliability, resilience and trustworthiness of their builders.
“We look forward to seeing the collective effort of all parties pushing through the harsh market conditions in the foreseeable future.”
The answer to the question above is probably not. The report highlighted the enormity of the task, considering:
1. Industry is struggling to return to pre-covid productivity much less overcome historic development ready land shortages.
2. Land prices jumped 28% in the last two years and rentals grew 37% since 2020 and are forecast to rise.
3. To deliver 1.2 million houses in five years, an average of 240,000 new homes must be built annually to reach that target.
4. Completions will decline over 2024-25, meaning the nation will need to build an eye watering 300,000 dwellings p.a. for the remaining three years to meet targets basically doubling existing delivery.
“A key insight is that the downward momentum in total housing supply has not slowed, despite improving performance in the apartment markets and flattening inflation figures,” said Dutton.
“Some of the issue is the lag effects on housing, but mostly, the weight of systemic market problems at the front end of housing delivery, is pulling down supply and ratcheting up prices along with rents.”
A recent iCIRT consumer survey shows that a majority of Australians are concerned about the housing situation.
More than half of respondents (56%) believe there aren't enough homes available to consider buying or moving into, and nearly two-thirds (64%) are worried that low supply coupled with high demand will compromise building quality, according to Equifax.
However, Walters said despite the ongoing supply shortage, “we have seen consumers continue to be enthusiastic about their property plan”.
“Our research shows that almost half of Australians (45%) have property plans for the next five years. In response to the market condition, Australians are understandably concerned with the high material cost and quality of buildings.”
There may be green shoots for the property market itself too as it enters a period of relative stability, according to Eliza Owen (pictured above centre), head of Australian research for CoreLogic.
“This year, home values are expected to rise once again, but at a slower pace than what was seen in 2023, suggesting a continued normalisation of housing cycles following the extremities of the pandemic,” Owen said.
As inflation is reined in, Owen said the main tailwind for the Australian housing market will be a potential reduction in the cash rate, that could enable more prospective first-home buyers to transition from the rental market to purchases.
“The construction industry will also have an opportunity to work down an elevated pipeline of projects, due to dwelling approvals falling, and construction costs steadying albeit at high levels.”
The 2024 edition of the State of the Land report can be viewed as the government’s “report card” on its efforts to boost housing supply and affordability.
“It gives an unvarnished account of the traction of government action and industry health,” said Dutton. “The conclusions are always intriguing, and a roadmap of what needs to happen to deliver supply, improve affordability and allow the industry to drive productivity.”
Dutton said the report is a clear warning for governments to act now to ensure housing supply is brought on line and affordability does not become even worse.
“We continue to see a national trend of steady decline of new housing supply since the peak in 2017,” he said.
“This is why the UDIA National’s advocacy is keenly focussed on measures that boost supply pipelines across the entire housing spectrum, preparing for population growth necessary for recovery and clearing away inefficient barriers to dwelling delivery.”
To view the full report, click here.
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