Post Budget - What an Economist Told a Room Full of Property Professionals

Last week I attended an economist presentation discussing housing affordability, construction costs and the broader economic outlook. A few days later I watched the 60 Minutes special covering the Federal Budget, where first-home buyers, business owners and Treasurer Jim Chalmers debated the future of housing and wealth creation in Australia.

Interestingly, despite approaching the issue from completely different angles, both discussions seemed to arrive at the same conclusion.

Australia doesn’t just have a housing affordability problem. Australia has a housing supply problem.

The 60 Minutes episode focused heavily on the frustration many first-home buyers are feeling. They spoke about struggling to enter the market, feeling like previous generations had access to opportunities that no longer exist, and questioning whether they will ever be able to get ahead.

The Government’s response is that reducing investor participation will create more opportunities for owner occupiers by reducing competition. Whether you agree with that approach or not, there is a much bigger question that sits underneath it.

If housing is already in short supply, does changing who buys the housing actually solve the problem? That question immediately took me back to one of the most important slides from the economist presentation.

 The discussion wasn’t about demand. It was about construction. The data showed that while productivity has improved across many sectors of the economy, productivity in construction has gone backwards. At the same time, construction costs have risen dramatically since 2020.

Labour costs have increased; Material costs have increased; Infrastructure costs have increased; Compliance costs have increased. Anyone who has built, renovated or sought quotes in recent years already knows this. Everything costs more.

The challenge is that Australia desperately needs more housing, yet it has become slower, harder and significantly more expensive to deliver. That’s the part of the housing debate I think gets overlooked.

A lot of attention is given to investors, first-home buyers, tax policy and affordability. Far less attention is given to the fact that the economics of building new housing have fundamentally changed.

If it costs substantially more to build a home today than it did five years ago, that creates a problem. If development projects no longer stack up financially, fewer projects commence. If fewer projects commence, supply remains constrained. And if supply remains constrained while population growth continues, housing shortages persist.

The economist’s presentation also challenged the idea that affordability alone will cause a significant housing downturn.

Affordability can slow price growth; It can reduce competition; It can cause buyers to become more selective. But affordability by itself doesn’t typically create a housing crash.

For that to occur, we would generally need an oversupply of housing, widespread financial distress or a large number of forced sellers. At present, we aren’t seeing those conditions. What we are seeing is a market where buyers are becoming more discerning and where quality assets continue to outperform average ones.

If there was one takeaway I took from both discussions, it was this: Housing affordability is becoming more challenging, but Australia’s supply shortage remains the much bigger story.

As a buyer’s advocate, that’s one of the reasons I remain dedicated to quality residential property in established locations. Because every year it becomes more expensive to build new housing stock.

And until we find a way to meaningfully increase supply, that underlying imbalance between demand and available housing isn’t going away.

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