Record supply of new homes in Australia means prices are falling

A record supply of homes for sale in the residential property market in Australia is helping to east affordability issues as an unprecedented number of new builds enter the market, a new analysis suggests.

For most of this century there have been constraints on new home building that have limited supply and forced up prices but since 2014 the rare of new home building has risen and is now having an impact, according to Tim Reardon, principle economist of the Housing Industry Association (HIA).

Indeed, the HIA’s latest forecasts for residential building activity says that the fall in house prices in Sydney and Melbourne is one indicator that affordability is improving but the change could dampen demand for new homes in the next 12 months.

‘The stalling of rental price inflation in the June quarter this year is the most important indicator as it tells us that the pent-up demand for new housing in Sydney and Melbourne is beginning to be met with a record volume of new housing,’ said Reardon.

‘The fall in house prices will dampen demand for new housing over the next 12 months. Add to this, the proliferation of punitive taxes on investors in the housing market, disincentives to overseas buyers and tighter oversight of mortgage lending for home purchases and the environment for residential building is facing significant challenges,’ he explained.

‘For these reasons we expect that the housing market will cool over the next couple of years, but the down cycle that has emerged, in certain segments of the market and locations, will be moderate,’ he added.

He also pointed out that detached house starts in March 2018 were the strongest quarterly result in 18 years and he said that leading indicators suggest that is likely to be another strong result for the June 2018 quarter.

‘On this basis, it now looks like we will round out the 2017/2018 year with over 120,000 detached house starts. This would be the strongest four quarter performance for the sector since the mid-1990s,’ said Reardon.

He believes that the market for apartments in metropolitan areas will be the most significantly affected by the improvement in affordability and by the regulatory imposts. In the March 2018 quarter Victoria posted a record high of 12,000 multi-unit starts, which accounted for nearly half of the 26,300 units that were commenced across the entire country. The slowdown in apartments is also likely to be focused on metropolitan Melbourne and Sydney.

‘The slowdown in Sydney and Melbourne is not consistent across the rest of their respective states. Strong activity in major regional centres has offset some of the decline in metropolitan areas. Queensland, Tasmania and South Australia are also on different trajectories and Western Australia is no longer in decline,’ Reardon added.