Accelerating House Prices to lead the next Development Cycle

Accelerating House Prices to lead the next Development Cycle

Over the past three weeks, there’s been a significant change in the inbound inquiry of residential developments at Hub Property Group. Melbourne house prices bottomed in March and values have been steadily climbing even though interest rates are yet to peak and a little confidence is slowly starting to filter into the medium-term view of this sector. Some specific macroeconomic trends are impacting home prices and if you are yet to get across them, here is a short summary of elements to look out for.

Shortage of Supply

The volume of housing supply over the past five years has continued to steadily decline as projects have faced challenging conditions when selling “off the plan”. Increases in taxes for offshore investors, the royal commission, political instability, construction cost inflation impacting development financial return hurdles and of course Covid-19 have all had a significant impact on new housing supply across Australia and in particular Victoria.

Residential developments are now taking significantly longer to complete than they did only a short time ago. Across the Hub Property Group portfolio, our residential projects are taking on average 6.5 months longer than they did pre-2020 due to several factors including delays from authorities, town planning extended timeframes and increased construction durations driven by labour and material shortages (impacted heavily by public sector projects in delivering Dan Andrew’s Big Build campaign).

To compound the problem construction insolvencies have surged and the lack of confidence in builders ability to complete projects has resulted in plunging construction starts.

The key takeaway is that fewer houses and even few apartments are being delivered than they were 5 years ago and if you are looking to buy a house or apply for a rental, there are fewer options for you to choose from.

Increased housing demand due to migration

While the supply of housing is low, the demand for housing is significantly higher boosted by improved interstate and overseas migration. There are clearly more people than there are available excess dwellings and therefore the competition for homes has become fierce.  Homeowners have been heavily impacted by the increase in interest rates but equally, renters are now feeling the hardship of increased rentals as the RBA grapples with trying to slow demand by increasing interest rates without crushing households, an impossible task.

Buyers are becoming increasingly confident that the interest rate cycle is close to its peak and therefore now is a good time to buy before they may fall again in the short to medium term. The major banks are already reducing fixed-term interest rate pricing which only supports this view.

Auction clearance rates are now the highest they have been in 15 months the lack of new supply will only mean there will be more buyers than sellers in the current environment with few levers to pull to current the imbalance.

At Hub, we believe there will be a V-shaped housing price correction and that housing affordability will worsen as prices rise due to these strong leading factors. Property developers are feeling more confident in forecasting escalation in revenue within their models and this looks to be the green shoots of the next construction cycle albeit with a unique set of headwinds we haven’t seen before.

If you have any questions in relation to these trends or wish to discuss how the current market environment may impact your project, don’t hesitate to contact Michael Hermans at Hub Property Group at michael@hubpg.com.au