Property markets to get ‘sugar hit’ from supply crunch, policy interventions – experts

While most home buyers breathed a sigh of relief from a sooner-than-expected market downturn, experts claim that a persisting housing supply shortage and potential policy interventions may prevent the market from further retreating.

Pete Wargent, co-founder of BuyersBuyers Australia, acknowledged that the Reserve Bank’s move to tighten monetary policy in May and June has already caused property prices to retreat. 

“There’s no doubt that a few interest rate hikes have put the previously positive property market sentiment into reverse gear. And we’ve already seen prices come off, especially in the upper quartile of the housing market,” he stated.

But despite the easing in property values, the expert said that the end of the housing supply shortage – which has been the main driver of the property pandemic boom – is not yet in sight. 

“The supply shortage even extends to stock listings, which are still at exceptionally low levels in most of the eight capital cities, as well as across most of regional Australia,” Mr Wargent said. 

To support his argument, Mr Wargent enumerated the reasons why supply won’t be flooding the market any time soon. 

“Further supply chain disruptions have put the afterburners under inflationary pressures in the first half of 2022, and interest rates in Australia are rising sooner – and faster – than had been expected only six months ago. 

“The other side of this is that widespread supply shortages are also in evidence in many aspects and dynamics of the housing market,” he stated. 

Mr Wargent further explained that there was already a “chronic shortage” of rental properties since the median household size declined throughout the pandemic, which put significant pressure on the available rental stock and caused advertised rents to soar in many regions.

He also highlighted that the shortage of building materials and availability of services has also driven construction costs higher, which made most developers wary of pushing on with pipeline projects and inevitably created a supply chokepoint. 

“A clutch of developers has already become insolvent, while many planned projects are now being put on hold or aborted,” he observed. 

And while some market observers remain hopeful about the availability of land supply, Mr Wargent said the numbers do not offer any reprieve. 

Citing data from the Housing Industry Association, BuyersBuyers chief executive Doron Peleg said that volume of land sales fell to record lows in the third quarter of 2021.

This decline continued into the December quarter, while the median land price soared 13.4 per cent last year, an increase of $35,900, he added. 

“Much of the available land was chewed up by buyers through the HomeBuilder stimulus, so a portion of this excess demand will now be redirected into the established housing market,” Mr Peleg stated. 

Policy interventions to reverse property declines from rate hike 

Mr Peleg warned that with interest rates set to further climb in the second half of 2022, not only the property market will be hit by weaker consumer sentiment, but the economy as well. 

Mr Peleg explained that “when house prices decline, the wealth effect goes into reverse, and consumer spending tends to slow quite abruptly”.

He said that while the cash rate target remains low in historical terms, sentiment remains crucial in the housing market, and the threat of further hikes over the coming months will be perceived as a negative for borrowers. 

Providing a potential silver lining, the expert said that there are a number of levers that may be pulled later in the year to turn around the declining market.

“Both governments and lenders tend to dislike low sales volumes and declining prices due to the direct impact on their revenues,” he stated. 

He pointed out that competition between lenders remains relatively strong and he forecasts there will be a concerted effort to lend to quality borrowers. 

The expert also highlighted that potential government stimulus and policy changes could never be ruled out.

“There are already first homebuyer and regional homebuyer incentives in place. And it looks as though the New South Wales state government may soon allow borrowers to opt for an annual tax instead of paying punitive stamp duty levies,” he said.

He said such schemes would “immediately juice the Sydney market with a short-term sugar hit by reducing the barriers to entering the market and increasing purchasing power”. 

Buyers to face tough decisions 

Mr Wargent said that marginal buyers would face tough decisions over the coming six to nine months.

“Advertised rents have increased by approximately 15 per cent over the past year, so prospective buyers need to weigh up the choice between a tight rental market and the potential for interest rate hikes over the next few quarters,” he said.

He cited Sydney’s asking rents on houses, which have surged by more than 20 per cent over the last year, and posited that the proposed stamp duty reform would tip some prospective market entrants toward buying rather than renting.

“Overall, the price of money is going up, but so too is the price of renting or building a home, so it’s a case of choosing your poison at the moment. There should at least be more [choices] for buyers in the second half of 2022 as listings increase,” Mr Wargent said.