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Three Residential Real Estate Trends to Watch

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Over the past two weeks I’ve concentrated on a range of external trends; social, economic and political events that have had an impact on the housing market since the second World War. This week I’m turning to three much more current residential real estate trends that each have an immediate impact on markets, and which heavily influence demand and prices.

There isn’t the need for much guesswork as to how these particular trends might shape the market. They are the fodder of everyday headline issues we are all familiar with, and the topics are interest rates, supply and population growth trends.

Interest Rates

The news around the direction of interest rates has for some months, only been in one direction and that’s down and down to almost unthinkably low levels. So low in fact that we may soon be entering uncharted territory as we may be looking at negative interest rates. Whether or not this becomes reality, low interest rates may well help drive more investment into property as investors search for some sort of positive return, remains to be seen.

However, what we do know is that the consensus view is for home loan rates to stay low and for possibly many years to come. A trend that should at least in part aid affordability and help sustain and encourage owner-occupier and investor demand.

Among our three trends we have a clear view, and that’s the reality of low and even falling interest rates.

New Supply

The second trend that has a huge impact on the market, and the wider economy is supply, and in particular new supply as a result of new building construction. Construction that includes both individual homes and medium and high-density apartment projects. The news here is similar to interest rates because we are seeing future supply rapidly falling.

The trend is creating the prospect of a shortage of new housing supply reinforced by the fact that August approvals fell like they have for five out of the past six, including weaker detached housing figures.

In August total new dwelling approvals fell 1.1%, after July’s 9.7% month-on-month contraction. The recent pick-up in housing prices in Sydney and Melbourne has not flowed through to the more demand for new housing. However, I suggest this is not surprising as the price gains may not be sustained if the wider economy declines.

The trend shown in Australian Bureau of Statistics (ABS) figures appears to indicate that developers remain cautious and are not rushing into new developments. Funding could be one sticking point however, I also suggest the market recovery still remains somewhat tentative.

Apartment construction is as a result heading ‘south’ and that’s a trend I highlighted a few months ago. Greater demand for apartments and increased demand for new detached homes will have to wait until there’s a sustained and widespread improvement in the prices being paid for established homes. It would not be sensible to predict any sort of quick recovery in the new apartment market and this will by 2021 restrict future supply.

Building approvals peaked on a rolling annual basis at 242,000 in August 2016 and currently we are near 180,000 dwellings and facing a 26% decline in activity. A continued trend of weak growth will be a further drag on economic growth.

However, while townhouses, apartments and semi-detached homes – rose 1.5% in August, the first month-on-month gain since May, the monthly new approvals total of 12,817 was the weakest result since July 2012, and high-rise apartments continue to suffer.

New approvals of units in blocks four storeys or higher slowed to 39,443 in the 12 months to August, down nearly 40% from a total of 64,553 just a year earlier.

In contrast, commercial construction ran-hot during the month and the total value of non-residential approvals surged almost 90% to $6.15 billion. This was underpinned by low financing costs, employment gains and brisk population gains in some centres which brings me to my third trend, population growth.

What we see in the broadest sense is falling interest rates, and falling levels of new construction impacting future supply, at a time when population growth mainly driven by migration remains positive.

Population Growth

Population growth is easily a very big factor driving the residential property market however, it’s also a sensitive point with some politicians, but according to a recent survey by the ABC not so with the general public.

According to the ABS Australia’s population at December 31, 2018 was 25,180,200, representing an increase of 404,800 people (or 1.6%) over 2017.

Compared to other OECD countries, this figure puts Australia’s population growth at the higher end of the OECD scale. We have healthy fertility rates and we have much higher migration. The recent 1.6% represents a substantial increase when compared to average annual growth rates for both this and the previous decade.

The average this decade has been about 1.5% a year and, for the century’s first decade, there were spikes of 1.8% in 2008 and 2009 as Australia kept it’s a strong immigration program active throughout the Global Financial Crisis.

Currently according to World Bank data, Australia ranks fifth among OECD members for population growth. Those countries doing better are Iceland ranked first with growth of 2.9% in 2018, followed by Israel, New Zealand and Luxembourg, which all recorded population increases of 1.9%.

Migration figures have accounted for more than 60% of population growth in 2016, 2017 and 2018 and only in 2002, 2003 and 2004 did natural birth exceed the migration intake for population growth.

However, migration levels remain a sensitive political issue. The Liberal Party’s policy ahead of the May federal election included a commitment to freeze immigration levels over the next three-years, along with incentives to encourage more regional migration.

Population growth is an important economic driver and contributes to our dynamic and diverse society and some figures show how important.

Last year the Australian population grew by more than 400,000 year on year, with according to the ABS, net overseas migration accounting for 61.4% of the growth. This helps to highlight the fact that in recent years, about 75% of local employment growth can be attributed to recent immigrants.

Research published in the Australian Population Studies Journal examining the impact of immigration on our employment growth after the GFC to July 2016, found that in the five-year period, employment increased by 738,800, with immigrants accounting for 613,400 of these jobs. Clearly providing a major boost to the Australian economy, including the housing market.

Given this reality and the desire to retain a robust economy the job for governments should I suggest remaining focussed on a plan for the effects of rapid population growth on infrastructure and resources. And simply cutting numbers might be popular but unsustainable.

Well beyond the immediate future, these three important topics; two factors, low and falling interest rates, falling construction activity (and slowing levels of new supply) appear to be going in the opposite direction to the third factor, with strong population growth driving demand for all levels of housing. And while growth might be strongest in Victoria, The ACT, NSW and Queensland will all be impacted.