John Locke’s late 17th Century philosophy on the effect of supply and demand as it applies to residential real estate is seemingly timeless, and for many Australians seemingly consistent. In living memory, at least, Australia’s demand for residential real estate has held relatively steady. This can be attributed largely to three factors;
- the policy settings of the Federal Government on immigration;
- the Reserve Bank’s fine management of GDP growth (and despite the recent events, it has mostly been a matter of managing growth); and
- interest rate settings (lower for longer) that regulate the economy and employment levels.
Though 2020 was an exceptional year for countless reasons, Locke’s demand philosophy holds true.
Naturally, a shock to the system that reduces Australian immigration by 85% will deeply upset the balance. What has previously been missing in this commentary equation is the vast number of ex-pats returning to Australia as a relatively safe haven from the pandemic. And there are calls for the government to do more to repatriate the remainder languishing overseas.
A proportion of these ex-pats will undoubtedly return permanently. For whatever reason they wish to stay, they will need to be housed in the medium to long term. So, the demand slide is not nearly as dramatic as predicted by some commentators and analysists. It seems that demand may have reduced by a relatively modest 15% due to factors such as levels of unemployment (now back to early 2020 levels) and a slight reduction in net population growth (immigration plus natural birth rate less migration).
Then there’s the other side of Locke’s philosophy. In considering supply, I need to get a bit more granular.
Let me focus on the situation in Sydney, where affordability has consistently been an issue for buyers and governments alike.
The forward indicator for future supply has been dwelling approvals. Housing supply has consistently lagged the peaks and troughs of dwelling approvals by one or two years due to the time taken to physically construct the house or a longer build time for medium and high-density dwellings. The number of dwelling completions has been consistently 20% less than approvals as a number of projects do not proceed.
Given this background, what would Locke’s philosophy say about the 50% reduction in the current Sydney dwelling supply and a 15% reduction in demand? Ultimately, 2021 and 2022 will bring about an affordability issue that will not be so easily solved through the levers that the government have pulled in the past.
There would be little consequence if the Foreign Investor duties and taxes were raised or reintroduced as there are very few foreign buyers in the market. Restricting bank lending to investors will have limited impact on demand as investors are largely non-existent at the moment. Mortgage serviceability limits has been a sledgehammer that the government has used in the past that was illogical. Raising interest rates to cool house prices is not likely due to the stress on other parts of the economy. The federal government and opposition policies rule out any changes to the tax system that benefit property ownership. And remember the immigration numbers can and probably will return to historic levels as quickly as it was reduced.
I will leave the final words to another eternal principle of Locke; we all have a fundamental right to “life, liberty and property”. Over the next two years, this right may very well be under threat.