Property downturn arrived sooner than expected, but shortages abound

Interest rates are rising, but this will only exacerbate supply shortages

Downturn is here

The property downturn arrived sooner than previously expected, but now there are looming shortages everywhere.

Further supply chain disruptions have put the afterburners under inflationary pressures in the first half of 2022, and interest rates in Australia are rising sooner – and faster – than had been expected only six months ago.

The other side of this is that widespread supply shortages are also in evidence in many aspects and dynamics of the housing market.

There’s already a chronic shortage of rental properties since the average household size declined through the pandemic, putting intense pressure on the available rental stock, and causing advertised rents to soar in many locations.

Then you look at the likely dwelling supply response and see that a chronic shortage of building materials and availability of services has also put a rocket under construction costs.

A clutch of developers has already become insolvent, while many planned projects are now being put on hold or aborted.

A clutch of developers has already become insolvent, while many planned projects are now being put on hold or aborted.

You’d hope for some respite through the availability of land supply, but here too the volume of land sales fell to record lows in Q3 2021 and continued to fall in the December quarter, while the median land price soared 13.4 per cent last year, for an increase of $35,900, according to the Housing Industry Association.

Much of the available land was chewed up by buyers through the HomeBuilder stimulus, so a portion of this excess demand will now be redirected into the established housing market.

There’s no doubt that a few interest rate hikes have put the previously positive property market sentiment into reverse gear. And we’ve already seen prices come off, especially in the upper quartile of the housing market.

But the supply shortage even extends to stock listings, which are still at exceptionally low levels in most of the eight capital cities, as well as across most of regional Australia.

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Policy intervention

Interest rates are expected to climb in the second half of 2022, dampening sentiment not only in the housing market, but also in the economy.

When house prices decline the wealth effect goes into reverse, and consumer spending tends to slow quite abruptly.

The cash rate target remains low in historical terms, of course, but sentiment is critical in the housing market, and the threat of further hikes over the coming months has been a negative indicator for borrowers.

The cash rate target remains low in historical terms, of course, but sentiment is critical in the housing market, and the threat of further hikes over the coming months has been a negative indicator for borrowers.
Figure 1 – Cash rate target

There are a number of levers that may be pulled later in 2022 to turn around the declining market.

Both governments and lenders tend to dislike low sales volumes and declining prices due to the direct impact on their revenues.

Competition between lenders remains relatively buoyant, so there will be a concerted push to lend to quality borrowers, while government stimulus and policy changes can never be ruled out.

Competition between lenders remains relatively buoyant, so there will be a concerted push to lend to quality borrowers, while government stimulus and policy changes can never be ruled out.

There are already first homebuyer and regional homebuyer incentives in place.

And it looks as though the New South Wales state government may soon allow borrowers to opt for an annual tax instead of paying punitive stamp duty levies.

This would immediately juice the Sydney market with a short-term sugar hit, by reducing the barriers to entering the market, and increasing purchasing power.

Buy versus rent equation

For marginal buyers, there are some tough decisions to be weighed up over the coming 6 to 9 months.

Advertised rents have increased by approximately 15 per cent over the past year, so prospective buyers need to weigh up the choice between a tight rental market and the potential for interest rate hikes over the next few quarters.

In Sydney, asking rents on houses have soared by more than 20 per cent over the past year, so the proposed stamp duty reform would tip some prospective market entrants towards buying rather than renting.

Overall, the price of money is going up, but so too is the price of renting or building a home, so it’s a case of choosing your poison at the moment.

There should at least be more choices for buyers in the second half of 2022 as listings increase.

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