Strong housing market defying migration demand shortfall

Strong ABS lending and building approvals, stimulated by HomeBuilder and low interest rates, is seeing a domestic home buyer resurgence bolstered by the record cohort of expats returning to Australia. However, decimation of visa class arrivals presents a looming market demand risk and future activity drop.

In net terms, we have seen three quarters of a million expats arrive back in Australia since January 2020. This has supported the homebuyer revival in new and existing housing activity, and helped offset a 700,000 net loss in usual visa classes over that timeframe.

Whilst the expats have bolstered demand, the loss of certainty in migration presents risk of a demand drop that will impact supply, creating further housing affordability uncertainty and disequilibrium.

In review of the surging ABS Building Approvals for FY2021, there were 219,720 dwellings approved which is 37,800 over the 20-year average of 181,800 approvals per year. Compare this then with the FY2020 figures of 172,659 which was 47,000 additional approvals above the previous financial year, that should have taken the edge off rising prices but it hasn’t.

Despite expectations of the pipeline dropping away back to sub 120,000 starts for the year ending June 30 2021, Australia will commence over 190,000 homes over the period to be reported which is extraordinary.

Further evidence of strong housing demand can be seen in the lending indicators. $319 billion in housing lending (excluding refinancing) occurred during FY2021. This compares to only $221 billion in lending for FY2020 and $212 billion in FY2019. In other words, there was an astonishing 44% increase in housing lending from FY2020 to FY2021. Lending for new construction is even more stark.

There was $36 billion in lending for new construction in FY2021 versus $19 billion in FY2020 and $18 billion in FY2019. This reflects an 89% increase in housing lending for construction in FY2021 over FY2020.

When considering the ABS Overseas Travel Statistics we can see a mammoth net 750,000 Australians enter the country since January 2020. Considering the long run trends there are around 435,000 Australians in the country that we wouldn’t reasonably expect to be here without the COVID pandemic. These Australian ex-pats coming home have created a surge in demand for housing with strong purchasing power. Since April 2021, this net flow of ex-pats all but stopped with this cohort set to restart the cycle to head overseas.

Meanwhile since January 2020, net 390,000 other visa classes have left Australia. Considering the pre-COVID migration trends there were around 700,000 visa classes that would have been in the country had COVID not occurred.

With the borders not set to reopen until mid-2022 and only opening slowly after that date, this population gap will continue to widen. Whilst ex-pat demand is fuelling current activity, this activity will drop away without the visa class demand driving ongoing growth to see housing activity continue at buoyant levels.

By and large the expat and visa classes have done what they have done, Australians have returned but as they usually do, they will leave again, however the visa classes won’t return in volume for some time. Additional housing demand levers of first home buyers and domestic owner occupiers have largely played out through this recent stimulus.

With this significant amount of new dwellings and new dwelling investment coming into the pipeline; there is likely more momentum left in the property market to potentially put a lid on prices and keep construction activity elevated through to the end of the 2021.

The longer-term prospects for housing demand are more questionable. The uncertainty is: if there is not a significant population growth story, then who are these homes being built for?

Whilst demand has washed through owner occupiers and first home buyers, the demand for affordability has only built up over the past two years and there could be a wave of politically palatable investment if directly focused on long term affordable housing delivery.

Structured government backed equity investment could create 10-20,000 dedicated affordable homes if government backed with 4-7 percent returns to sure up the housing delivery pipeline as we get to an uncertain 2022-23 year ahead.

The post-COVID-19 and current 2021 Delta lockdown reality impacting low population growth is yet to show impacts on housing affordability even at this heightened activity. There is a need to think beyond recent stimulus to focus on a dedicated affordable supply with a lens to balance a situation that we have never faced as a country.  .