With permeant arrivals reminiscent of Australia’s post-war era of nation-building, Shane Oliver chief economist with AMP Capital argues that it’s now impossible to escape the conclusion that immigration levels need to be calibrated to the ability of the home building industry to supply housing.

March quarter data reveals that Australia’s population rose by 563,000 or 2.2% over 12 months, with 454,000 of that coming from immigration alone.

Permanent and long-term arrival data up to July also suggest that the surge in immigration puts Australia on track for net immigration of 500,000-plus in the last financial year.

Based on rough estimates, if home building supply capacity is 200,000 dwellings annually, Oliver thinks immigration levels need to be cut back to 260,000 from around 500,000 now.

“But if capacity is just 180,000 dwellings pa or we want to reduce the accumulated supply shortfall by say 20,000 dwellings a year then immigration should be cut back to near 200,000 people a year,” he notes.

The rebound in population growth has taken the property market back into undersupply again.

Compounding shortfall

Admittedly, immigration has been playing catch-up since the pandemic slump, but one of the unintended consequences, adds Oliver is that surging immigration is only making the housing shortage worse.

“The unit-building boom of the second half of last decade and the slump in population growth through the pandemic helped relieve the imbalance but the unit-building boom was brief and a decline in household size from 2021 resulted in demand for an extra 120,000 dwellings on the RBA’s estimates,” said Oliver.

“But the rebound in population growth has taken the property market back into undersupply again.”

The surge in immigration has pushed underlying demand for homes to an average 220,000 dwellings over the three years to 2025.

But thanks to rate hikes and capacity constraints, Oliver estimates that dwelling completions look like averaging around 175,000 which means a new shortfall each year of about 45,000 dwellings adding to the already existing shortfall.

House affordability

In addition to the immigration demand/supply mismatch, development controls – which have limited housing supply and interest rates dynamics – have contributed to deteriorating housing affordability in recent decades. As a result, the ratio of home prices to wages and household income has been on the rise since the 1980s.

If the 2023 Dermographia Affordability Survey is any proxy, the median multiple of house prices to income for major cities is 8.2 times in Australia versus around 5 times in the UK & US, and in Sydney, it’s 13.3 times.

Oliver believes that the share of mortgage interest as a share of household income -which he expects to rise to record levels once current interest rates fully flow through – will continue to increase inequality that threatens social cohesion.

Who is going to build 1.2 million homes?

In an attempt to improve housing affordability the Australian government is aiming to build 1.2 million new homes over five years from July 2024.

But despite unanimous support for this initiative, there’s growing skepticism over who exactly is going to build this number of dwellings.

Australia’s ability to build nearly one million new homes (or 200,000 pa) over the five years to 2022, mostly in the private sector, is encouraging. However, labour and material shortages and regular failures amongst homebuilders have arguably put lead in the industry’s saddlebags.

While Australia may be able to get this back up to 200,000 pa with more units/lower cost housing in the mix, Oliver says it’s harder to see where the capacity is going to come from to get to 240,000 dwellings a year.

Australia’s need to boost new home construction coincides with some sobering statistics. In the face of spiraling borrowing costs, soaring costs and economic uncertainty, Australia’s largest home builders experienced a 23% drop in starts last year.

Based on HIA figures, housing starts from Australia’s largest 100 builders fell to a 10-year low 57,830 in the year to June. Meantime, insolvencies were up around three quarters (73%) with builders being caught out by fixed price contracts in the face of rising input costs.

But on a more positive note, HIA data also suggests a narrowing in the construction time on a detached home from 12.2 to 11.5 months.

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