Diagram showing a negative demand shock to housing and increases in supply. Image: The Property Tribune
  • Negative demand shock has had biggest impact on rentals and apartments
  • Federal and state government stimulus is supporting housing supply
  • Supply exceeding demand puts downward pressure on rents

According to the 2020 State of the Nation’s Housing report published by the National Housing Finance and Investment Corporation (NHFIC), it is predicted that new demand for housing will fall by 286,000 dwellings between 2020 and 2025.

This report has been the first assessment of housing supply and demand across Australia since the National Housing Supply Council (NHSC) was abolished in 2013.

The NHSC’s last report released in early 2014 projected that the gap between the supply and demand for housing was to increase, putting further pressure on housing prices. It expected a cumulative demand-supply gap of 557,000 dwellings in 2025.

COVID-19 reduces growth of demand

NHFIC’s latest report reflects the unforeseen circumstances of COVID-19, which brought an unprecedented negative demand shock to new housing.

Uncertainty about the general economic outlook has affected the decision-making process of households in their purchasing of property, and developers in providing new supply to the market.

However, the lower growth of demand for new housing is likely to be temporary.

Once the economy strengthens and there is a return to normality of Australia’s migration program, new demand is expected to exceed new supply from 2023 to 2025.

Supply supported by government stimulus

Construction activity is holding up relatively well with support from government and central bank stimulus (the cash rate currently remaining at a record low of 0.1%).

The report expects that new supply will exceed demand by around 127,000 dwellings in 2021 and 68,000 dwellings in 2022.

New supply is expected to be around 93,000 higher than new demand by the end of 2025, which is likely to cause downward pressure on rents in Sydney and Melbourne where vacancy rates are higher (this is illustrated using the simple supply and demand diagram in the feature image).

This short-term period of supply outstripping demand can be seen as a partial catchup to make up for much longer periods of undersupply in the 2000s.

The report warns that if supply is not responsive to demand as predicted, longer term trends of declining affordability for low-income households in the private rental market and first home buyers are likely to persist.

Report conclusions

Easing of monetary policy has driven a strong rebound of lending commitments since March and May of 2020 (the Australian Bureau of Statistics (ABS) lending indicators show lending commitments increasing in every state and territory).

The report concludes that the lower period of housing demand caused by the global pandemic presents an opportunity to reflect on policy frameworks.

Policymakers should ensure that planning policies can accommodate future population growth without adverse consequences for affordability.

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The full report is called State of the Nation’s Housing 2020 (available online).

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