Source: Australia and New Zealand Property Journal
Medium to high-density housing is an increasingly critical component of Australia’s residential real estate market, with CoreLogic’s August data suggesting units comprise 25.9% of national housing stock and around 30.4% of Australia’s capital city housing stock – up from 19.6% and 22.9% at the start of 2010, respectively.
Around 30% cheaper than capital city houses, themedian value of $637,593 capital city units are a more affordable entry point for first home buyers, while also providing lower maintenance options for both investors and downsizers.
Within its latest ‘State of the Nation’s Housing’ report, the Nation’s Housing National Housing Finance and Investment Corporation (NHFIC) forecasts 59% of the [housing] shortfall to come from the unit market.
Overall, NHFIC expects a national housing deficit of around 106,300 by 2027 (later upgraded to 175,000).
Contributing to this deficit are below-average unit approvals and completions.
Unit approvals down
The latest ABS building approvals data (July) reveals 4,490 units were approved for construction, down -19.9% from the month prior and -39.8% below the decade average. The overall trend in new unit approvals also remains below the decade average since mid-2018 and well below the trend in house approvals since late 2017.
Interestingly, while house completions have held close to the decade average, the latest ABS building activity data also shows an easing in unit completions.
For example, in the past decade, units have accounted for approximately 41.7% of total new housing completions nationally. However, over the March quarter of 2023, units comprised just 37.1% of completions, holding around -27.1% below the decade average.
With fewer unit projects set to move through the construction pipeline, Kaytlin Ezzy, Economist at CoreLogic Property Pulse expects completions to continue to ease – with units making up a smaller portion of new housing stock over the coming years.
Building sector constraints
Ezzy notes that while completions and approvals are low, the pipeline of unit projects yet to be completed is relatively high. Meantime, unit commencements have jumped from 12,782 in the December quarter of last year to 19,981 through the first quarter of 2023.
“Constraints across the building sector have meant the number of units approved but yet to be completed have swelled to over 158,000 as of March this year,” said Ezzy.
“However, both unit commencements and the total number of approved units in the pipeline yet to be completed, remain below the highs of the mid-2010s. While unit construction fails to reach new highs, demand pressures for housing remain high.”
In the year to March 2023, net overseas migration reached a new record high, with 454,400 people added to Australia’s population. At the current average household size, this equates to an additional 181,723 households.
More arrivals – fewer departures
Ezzy attributes skyrocketing overall housing demand to a stronger-than-expected level of net overseas migration, amid high levels of overseas arrivals plus a 25% drop off in departures relative to the pre-covid average.
“In the year to March 2023, net overseas migration reached a new record high, with 454,400 people added to Australia’s population,” said Ezzy. “At the current average household size, this equates to an additional 181,723 households.”
With most long-term migrant arrivals renting before buying, capital city unit rents recorded a new record high annual growth rate over the year to May (16.5%) before easing slightly over the 12 months to August (14.9%).
Temporary supply vacuum
Ezzy expects an elevated pipeline of units under construction, high interest rates, and low consumer sentiment to temper unit demand and price growth. However, once the pipeline is worked through, she says it could be a different story.
“Once the pipeline is worked through, Australia faces a relatively low number of approved projects, which may create a temporary vacuum in new unit supply,” Ezzy noted.
“With the cash rate potentially easing in 2024, greater purchasing demand could fuel a stronger price boom in the unit market at this time.”
