Post-election housing market outlook driven by 3 fundamentals

Even with the recent change in government, property fundamentals, supply and demand, will continue to drive the housing market outlook.

Housing fundamentals

With a change of government now afoot, supply and demand factors will drive the housing market as always.

Firstly, the growth in Australia’s headcount has been exceptionally slow since the onset of the pandemic and the second quarter of 2020, slowing to just 0.3 per cent growth over the year to September 2021.

The natural increase in the population – births minus deaths – continued to add 136,200 to the population, but a lack of immigration combined with the loss of huge swathes of temporary visa holders saw population growth to extremely low levels that we haven’t seen before in modern history.

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Demographic trends may be a little haphazard in the short term, and it will take time for border movements to normalise fully, but the new government is likely to embrace strong immigration. We expect the population growth rate to return to its recent ‘normal’ of around 1½ per cent, or perhaps a little lower, which adds significantly to housing demand.

For example, 1.4 per cent population growth which would equate to a population increase of around 360,000 persons per annum.

Graph showing decline in Australian population change
Figure 1 – Annual population change, Australia

There are some important internal demographic shifts to take note of, including a gradual return to the office and big city living.

Secondly, there is a looming challenge around housing supply. Nationally, rental vacancy rates have plummeted to around 1 per cent as employment has surged to a record high.

Rental vacancy rates in many parts of the country are at levels associated with a rental crisis. Indeed, asking rents for houses have jumped 10 to 20 per cent over the past year, and more in some regional locations. It’s not yet clear how the new government will plan to tackle this from a policy perspective. A vacancy tax may be effective but could be considered a radical move for a newly formed government.

A vacancy tax may be effective but could be considered a radical move for a newly formed government.

Meanwhile building approvals are falling away sharply, and with the costs of materials and construction steepling many of the dwellings under construction may not be completed in a timely manner, with construction insolvencies making recent headline news.

A dearth of new supply is set to characterise the market over the next couple of years, despite the ALP’s affordable housing fund proposal.

In terms of stock for sale, more vendors have listed properties this year, but to date, there has still been come caution, and stock levels around much of Australia remain tight for the time being, and well below their 5-year average across the capital cities.

Cost of living challenges

The third major fundamental driver of the housing market post-election will be inflation and its related impact on the cost of money. Supply shocks from overseas have seen headline inflation jump to above 5 per cent in Australia.

The Labor Party campaigned with an agenda to increase real wages, particularly for lower-income workers, and also to bring down consumer prices. Due to a lack of policy detail, it’s not yet clear how these potentially competing agendas will be reconciled, especially with the fuel excise cut ending later in the year.

Bond yields have begun to calm down a little, and it may be that inflationary pressures prove to be transitory, but financial markets still expect the cash rate target to increase over the remainder of 2022, and housing market participants will naturally be wary of this.

Financial markets still expect the cash rate target to increase over the remainder of 2022, and housing market participants will naturally be wary of this.

Overall, the cash rate target remains low for now and coming off the back of 7 years of inflation undershoot, the accommodative policy would appear to make sense. The Reserve Bank wouldn’t want to be responsible for driving a hard landing through being too aggressive with interest rate hikes.

Overall, the upper quartile or top end of the housing market is most likely to be impacted by rate hikes, with far less impact on the lower or cheaper end of the market.

Housing market policies

The specific housing market policies taken to the election are not likely to be major drivers of the market in themselves. Homeownership is likely to be in focus, but the ALP’s proposed Shared Equity Scheme is set to be capped at 10,000 places per annum, so unless that is changed or there are widespread first homeowner grants rolled out across the country that alone won’t be a market mover.

The ALP’s proposed Shared Equity Scheme is set to be capped at 10,000 places per annum, so that alone won’t be a market mover.

Housing market demand is more likely to be driven by employment and wage growth. Employment and job vacancies are both at record highs, so there’s a genuine prospect that the unemployment rate can fall toward 3 per cent over the year ahead.

The challenge will be whether that can be sustained as interest rates rise, but overall the labour market fundaments are presently in a very strong shape.

As immigration returns at a time of limited supply, we can expect any price reductions in the market to be limited.

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