Covid fallout to cause supply shortages for another two years

The impact of Covid-era policies is likely to lead to housing supply shortages for the next two years, according to new research.

The research, The new normal: changed patterns of dwelling demand and supply, undertaken for the Australian Housing and Urban Research Institute (AHURI) revealed that rising building costs and construction delays have pushed demand into the established dwelling market and seen a huge shortfall of apartment builds.

Lead author, Professor Steven Rowley said the lack of new housing supply predicted in the next two years will have implications for both the home ownership and rental markets. 

“Australia will be dealing with the impact of COVID-19 on its housing markets for some time as increased construction costs and a reduced appetite for risk impede new housing supply,” Professor Rowley said.

He said there were concerns around new housing supply given the huge increase in population that the government is undertaking.

“Increased construction costs resulting from labour and material shortages have played havoc with the multi-residential sector,” he said.

“Many private sector developments are no longer profitable and builders are not wanting to take on the risk of residential development. 

“This will have serious implications for housing markets over the next couple of years, contributing to a housing supply shortage. 

“The lack of new supply and strong population growth means upward pressure on both prices and rents – not good news for potential purchasers or anyone in the rental market.”

According to Professor Rowley, the increase in building costs, combined with construction delays, led to an increased demand for established dwellings, however, this situation creates a vicious cycle of housing scarcity.

“Owners of existing properties are reluctant to sell as there are a lack of options to buy,” he said.

“A very tight rental market means renting in between selling and buying a dwelling is difficult.”

The AHURI report also found Covid changed what households want from their home including more space, both inside and out, which was linked with the ability to work more from home and a heightened demand for lifestyle locations. 

Professor Rowley said the pandemic led to significant and distinct changes in where people wanted to live, with low or negative growth in inner urban areas growth in regional towns and cities and strong growth in traditional first home buyer areas, primarily on the urban periphery.

“The pandemic showed us just how quickly demand for housing can change, with a shift to home buyers wanting to escape metropolitan areas; to larger homes and more private space; and to work from home in lifestyle locations,” he said.

Despite the initial change, Professor Rowley said we were shifting back towards pre-pandemic patterns of demand. 

“While COVID drove some permanent changes, such as working from home opportunities for many, and a surge in regional house prices, the market appears to be returning to pre-pandemic patterns with location and affordability the key drivers,” he said.

“Interest rate rises have played a key part in this with the cost of buying having risen sharply. 

“Tight rental markets across the country have limited household movements.”

Professor Rowley said governments must continue to work on policies that make it easier to deliver housing within existing urban areas, and this housing must deliver diversity, not simply be dominated by apartments. 

“It will take a partnership between government and the private sector to deliver more diverse housing options in many regional areas where the private sector struggles to operate,” he said.

“It’s critical that government supports community and not-for-profit housing in regional areas where housing demand is acute, but where traditional finance and development models are less feasible

“Governments should take a more direct role in housing supply, including through large scale delivery of social and affordable housing, both in cities and in regional areas. 

“Protecting supply chains and training a workforce to respond to supply pressures is also essential.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.