A housing shortage, unmet demand, and an attractive investment alternative

Regardless of short-term economic movements, Australia has a significant and persistent underlying housing gap. Population growth was averaging around 1.5% annually in the years leading up to COVID-19 and fell significantly as borders closed. However, the rate of overseas migration is recovering, and population growth along with it.

A conclusion was drawn by a NSW Productivity Commission White Paper in 2021, which identified a backlog of 40,000 dwellings at the start of that year. The report stated: “Assuming all currently forecasted apartments are completed without delays, supply will still fall short of the estimated increases in demand between now and mid-2026, with cumulative unmet demand estimated to reach at least 60,000. With 75% of the apartment pipeline to 2026 still to commence construction and facing constraints … there are significant risks that completions will be lower than expected”¹.

At the heart of the supply and demand mismatch is a difference in cycle times for development versus investment. An academic study found that the Australian property market “is often in an overdemand situation rather than oversupply, which can be explained by the different patterns of the property cycles on the demand and supply sides. Property investment cycles are shorter and more volatile than development cycles at around 8-10 years and more than 20 years, respectively”².

The outcome of this persistent shortage of housing and other property assets is that the long-term fundamentals make this sector attractive to investors. Regardless of short-term price movements, the market dynamics are strongly supportive of a robust property investment industry with decades of demand ahead of it.

The key conclusions from Zagga’s last whitepaper are that:

• Australia’s economic fundamentals are sound, including strong employment, growing population, and sustainable levels of household debt. These forces are important predictors of the real estate market demand over the medium and long term. Whilst potential recessionary conditions would impact these fundamentals in the near term, it is unlikely to reverse them, rather just slow them down.
• There is an ongoing undersupply of residential property that may increase over time, as shortages are cumulative in their impact. This will likely underpin the strength of the real estate development and construction sector for many years to come. If anything, recessionary factors will only exacerbate this shortage. Demand for funding to meet this home construction gap is expected to be significant.
• Property shortages are not confined to residential housing, with commercial sectors such as Industrial continuing to experience significant demand that has not been matched by supply. This demand will be likely to spur successful development in such sectors.

Continue reading via the Whitepaper attached.