Why lower supply and higher immigration means house prices can only go higher

The key factors that pushed house prices higher in 2023 remain set in place for 2024 … except in Melbourne.

AMP senior economist Diana Mousina says ‘upward pressure on home prices will remain for some time yet.’ Picture: Supplied

House prices and rental charges across Australia are set to surge again this year, with the startling exception to Melbourne.

An undersupply of housing – combined with increased immigration – has already seen the average national house prices set to increase by about 8 per cent this calendar year, but the nation’s second-biggest city will not be keeping pace.

In fact, there are already pockets of Melbourne where prices are falling. The most recent year-to-date figures from the CoreLogic group showed Melbourne dropping 0.9 per cent against a 4.3 per cent lift nationwide.

Diana Mousina, economist at AMP, has issued a new report on the national housing market, pointing out that NSW and Queensland have an “under­supply” of new housing: in contrast, Victoria is in the rare position of having an oversupply.

“Overall high population growth in recent years and the low levels of dwelling construction has made the housing shortage worse,” Mousina says. “We think that (nationwide) construction levels will remain below underlying demand and keep upward pressure on home prices.”

Her report finds undersupply in Queensland and NSW is the key factor driving prices higher.

In contrast, Victoria’s undersupply coincides with Melbourne’s position as being the weakest metropolitan market for investors.

Western Australia has the strongest home price growth, however the state is also seen as particularly affordable compared to eastern states.

Some industry analysts had warned of a soft patch in the housing market mid-year after softer figures in July, but the AMP report sees little that will change the existing dynamic that has pushed the market higher for two years in a row.

New home builds hit a peak in 2019, but the outstanding issue for the housing sector is that the number of new builds has never recovered. Over the year to March, 172,000 dwellings were completed, but recent data suggests that over the next 12 months, completions will drop to 160,000 per annum.

At CoreLogic, economist Eliza Owen says: “We are now seeing the biggest divergence among different regions in over a decade.”

According to Owen, “Melbourne is different – there has been a very large building program across the state of Victoria – over the last decade, there may have been around 100,000 more homes built there than in NSW.”

“On top of that, there are more sellers than buyers, which means you have a very different market in Victoria than you have elsewhere.”

On a nationwide basis, the largest housing undersupply is in Queensland and NSW, followed by Tasmania, the Northern Territory, Western Australia and South Australia.

Meanwhile, Victoria offers the largest oversupply of dwellings, along with some oversupply in the ACT.

Separately, the outlook of higher prices for homes means higher rental costs for tenants – nationally, the rental market remains tight and Mousina at AMP expects that growth is running at 8 per cent over the year to March,

However, lower immigration volumes may be starting to crimp rental growth.

She estimates rental increases closer to 5 per cent going forward.

At that level, rental growth would continue to run ahead of inflation.

As the AMP report concludes, “Fundamentally, Australia is not building enough homes to keep up with demand, which is putting upward pressure on home prices and rents.”