Forget about interest rates, cost of living and the economy - one factor is dominating the property market
Interest rates and inflation have dominated business page headlines for years but when it comes to the property market today, another variable is driving price growth and housing supply shortages more than any other.
The controversy about Australia’s record population growth continues, particularly when it comes to the ever-increasing demand for residential properties, whether that is to buy or rent.
At the same time, construction levels of new properties are actually in decline.
The most fundamental driver of real estate prices is the equation of supply and demand, with population growth at the centre of it all.
Irrespective of the size of the current demand, which is always on the increase, the greatest problem of all is that housing construction is in decline when an increase in output has never been required more.
It will take years for this situation to turn around.
Labour shortages versus population growth
We definitely have a catch-22 situation.
All over the country we see a critical need for more people to fill crucial jobs. The army is reporting a shortage in its ranks. Police forces around the country report are reporting the same. There is a shortage of doctors and nurses, and so it is in so many industries all the way through to restaurants and coffee shops, all who can’t find critical labour for their business to work.
Not only is there a need for the current record levels of immigration to meet these essential services within Australia, but there are even calls to increase immigration.
One of the main causes of our decline in residential housing construction is exactly the same problem - labour shortages.
Governments from around Australia at federal, state and local government levels have all boosted infrastructure spending on everything from roads to schools to sporting facilities and much, much more.
It has led to competition between the government and private sectors for engineers, construction workers, plumbers, electricians and the like.
Hearing of the failure of so many builders in the private sector over the past year or so, building contractors are now more inclined to take government than private sector jobs.
Construction firms in the private sector are subsequently reluctant to take on any jobs, because they can’t find the skilled labour required. We desperately need more immigration targeting foreign construction workers to help boost our housing supply.
So, a catch 22 situation is that population growth is definitely feeding the demand for real estate, so a slowdown in immigration would help ease the pressure, however, without boosting immigration we are short of so many workers across the country in essential services roles, which will do great damage to the economy if those roles can’t be filled.
Without targeted immigration for skilled construction labour, we are likely to see continuous declines in construction levels and hence even greater pressure in our housing markets going forward.
The big factor driving property prices
Forget about interest rates, cost of living and even the health of the economy as the primary drivers of the real estate market.
It is this fundamental issue of the supply and demand equation that will take years and years to resolve and most likely even if they could wave some magic wand and boost construction levels, we wouldn’t see any significant supply into the market within five years, at which time our housing demand with be even greater than what it is today.
This problem is with us for a long time to come, impacting buyers and renters alike.
No question for investors, these are the most favourable conditions.
While interest rates, cost of living and even some government policies around tenants’ legislation can be off-putting, the bottom line is that rental returns will be the best that investors have experienced in decades and capital growth will continue to deliver significant wealth to investors.
