What our future housing market would look like
Spiralling prices have squeezed many young Australians out of the housing market and there does not seem to be any short-term relief.
Record low birth rates and net negative migration saw Australia’s population growth dry up during the pandemic.
This sounds like great news for first home buyers who have long been waiting for lower house prices. Far from it.
House prices continued to grow to record heights fuelled by cheap money and demographic dumb luck – the pandemic just happened to hit us at exactly the moment when the huge millennial generation finally started to have families of their own and fled their inner-city apartments in search for family-sized houses.
This enabled house prices to rise despite low population growth. Low-income millennials, and even high-income millennials with low savings, are still desperately hoping for the housing market to cool off.
To them it feels like house prices will continue to grow forever and they will never be able to enter the housing market.
What future price developments can we expect?
Let’s start with the future dwelling stock and the type of housing that will come online soon.
Since June 2020 we’ve seen approvals for new houses go up big time. We are talking about an increase of 40 per cent compared to the long-term average. Adding more houses to the market will eventually slow price growth for the 3+ bedroom market in the next few years.
In the 2030s our demographic profile will really help to soften house price growth.
This is when more than usual established homes enter the market as the first wave of baby boomers starts downsizing.
Older Australians don’t tend to downsize for financial reasons (sell the family home, buy a small home, use the difference to top up the retirement fund). Rather, Australians tend to stay in their family home until it becomes a nuisance to manage or even a physical hazard.
Baby boomers won’t reach that stage of the life cycle until the 2030s. When their homes enter the market, a relatively small cohort of first-home buyers in their 20s and 30s will be around.
This means upgraders will enter the market at scale too. Their old homes might be more affordable for the first-home buyers than the old baby boomer homes. There will be a lot of reshuffling going on in the housing market in the 2030s.
Back to recent approval figures. Way more houses than apartments got approved in the last year.
Most international students and young skilled migrants that left Australia since March 2020 lived in 1-to-2-bedroom apartments.
Millennials also vacated smaller inner-city dwellings when they purchased family-sized homes in suburbia or in the regions.
Small inner-city apartments were the hardest hit housing segment. It makes perfect sense that approvals for apartments are down for now.
What does the future hold for the apartment market?
Australia just recorded an insanely low unemployment rate of 4.5 per cent despite the two largest cities being in lockdown. That was mostly because many workers left the labour force and are simply not counted towards the unemployment rate anymore.
Nonetheless, businesses across the country struggle to fill job openings because workers with relevant skills just aren’t available. We lack skilled workers and businesses can’t wait for the borders to open again.
This heightened demand suggests we will immediately see international students and highly skilled migrants return once border restrictions are loosened. Most of them will settle in apartments near the city centres. That will allow the apartment market to recover. At scale this recovery is probably two years away though.
The simple return of international students and skilled workers will do much more for the health and vitality of our CBDs than any flash marketing campaign.
Market forces ensure that we will be building enough houses to soften price growth in the housing market and the eventual return of migrants will allow the apartment market to recover.
All of this occurs in the context of a national workforce that is increasingly split into high-income earners and low-income earners with a shrinking middle-class. There will be no more “median homes” that are an option for most Australians.
There will instead be a housing market for high-income earners where margins are relatively high and a separate housing market for low-income earners where margins are scarily low.
Markets will probably fail the low-income earners, which suggests that the need for social housing will continue to grow until the government is forced to act as a developer of housing for the least financially lucrative segments in the housing market.
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