Builders hope immigration will dig housing market out of a hole

Rising interest rates have put the brakes on new home sales but builders hope ‘massive immigration’ will bolster Australia’s housing market in the medium term.

Home builders are struggling to sell houses in estates around Australia as interest rate hikes bite and buyers are more cautious about purchasing property when the economy is weak.

Home buyers also face uncertainty from the chaos caused by the collapses of major builders, which is cascading through the ranks of subcontractors and forcing cost rises onto purchasers.

But these tough conditions could give way to a rosier medium-term picture, which is being boosted by what one developer called “massive immigration” into Australia, driving up demand for rental properties and, eventually, purchasing.

Macquarie surveyed nearly 30 sales agents at detached home builders across Australia and found about half of them had experienced flat sales over the past three months and only nine per cent expected sales to improve soon due to uncertainty about the outlook for the cash rate and generally weak buyer sentiment.

Builders reported tough conditions with most not expecting a recovery in sales over the next three months.

“Uncertainty on the peak cash rate is likely to continue to weigh on sales in the near-term, but long-term fundamentals are strong given migration and low residential vacancy,” Macquarie said.

The bank said data from the Housing Industry Association was “broadly consistent” with the survey, with new home sales over the past three months marginally improving after a sharp decline over the second half of 2022.

Buyer access to credit was cited as the key reason for declining sales by 77 per cent of respondents. Some builders also flagged a particularly strong decline in first homebuyer interest with cash buyers more resilient to rising rates and tightened lending standards.

The relatively weak residential sales environment translated to a decline in land prices according to more than three-quarters of those surveyed as rebates were offered to stimulate sales. Commercial agents have reported that site values are also falling due to the difficulty of getting pre-sales for hi-rise projects.

Macquarie surveyed nearly 30 sales agents at detached home builders across Australia and found about half of them had experienced flat sales over the past three months.

Macquarie said the further four 25 basis points rate hikes since the start of February, including the May and June rate hikes which surprised the market, along with a clear shift in monetary policy guidance to a more hawkish bent this month “has taken the wind out of the residential stock recovery in the near term”.

Property developer AVJennings said that market conditions remain challenging with ongoing increases in interest rates continuing to dampen buyer interest in the new housing market.

The home specialist said sales levels had generally been consistent over the past few months, albeit at a muted level due to the macro-environment factors, with demand for its completed, built-form homes growing due to its unique offering.

“We continue to see good conversion levels as leads are primarily comprised of buyers with strong purchasing intent, noting the time to exchange continues to be protracted,” AVJennings said. It has pared back production in response to slowing demand but is positioning for an eventual market recovery.

“The company remains watchful on potential land acquisitions which complement capital efficient structures in line with strategic objectives,” it said.

Property developer Aspen Group said that national residential markets were experiencing historically low vacancy rates and very strong rental growth.

“Post the borders reopening, demand for accommodation has rebounded due to massive immigration and people moving more freely around the country,” the WA-based company said.

“Meanwhile, building time frames and costs have escalated due to supply bottlenecks, labour shortages and an abnormally high level of insolvencies in the building industry. Additionally, interest rates have normalised from artificially low levels, which has increased the investment return and therefore rent that landlords require to provide their capital and effort.”

Stock investors are starting to position for an eventual recovery in residential volumes and earnings, but investment bank UBS said the cycle was very different from earlier shifts.

They said the pandemic had prompted government stimulus and ultra low interest rates that drove extreme residential demand. But production lagged as it was affected by lockdowns, Covid absenteeism and material shortages as global supply chains seized up.

UBS called out affordability issues as mortgage repayments are approaching a record level of more than 40 per cent of incomes as rates have been hiked. The bank noted forecast immigration of 387,000 this year would keep rental vacancy at under 2 per cent and underpin about 10 per cent rent growth.

The bank warned that production challenges remained.

“We don’t expect a rapid normalisation of approvals to more than 100,000 houses due to a lack of skilled labour and crowding out from non-residential construction,” UBS said.