Australia: Rapidly rising supply will need new immigration or foreign investors
The positive response of the Australian housing market to the pandemic did not surprise us. It was to be expected given the massive fiscal stimulus geared towards protecting household’s income and the Reserve Bank of Australia (RBA)’s swift action to keep interest rates close to zero through yield curve control (YCC). In fact, after falling at the beginning of the COVID-19 shock, home values increased for seven consecutive months since October 2020. What was behind this positive development was the tighter supply-demand condition with the nationwide vacancy rate falling to 1.9% in April, the lowest level since 2013.
The ongoing economic recovery is anticipated to further support the housing market in the short run. By easing social distancing rules, the Australian economy has been undergoing a rapid recovery with a fast pickup in business sentiment. Consequently, the unemployment declined rapidly to 5.6% in March, with job ads pointing to further improvement in the labor market. As household finance improved, 95% of all deferred housing loans resumed repayments by the end of February. Therefore, with rising housing affordability, the real estate market is anticipated to enjoy a tailwind from a stronger demand in the short run.
However, clouds are coming from the supply side. With the RBA announcement that monetary policy will remain accommodative until 2024, housing approvals have accelerated since September 2020. The question, thus, is how strong demand can be in the current recovery and beyond. Firstly, domestic demand could arguably be insufficient to match the growing supply in the medium term. Housing debt has remained close to the historically high level at around 140% of disposable income. Secondly, as the risk of COVID-19 lingers globally, tighter border controls could continue to restrict immigration to Australia, which would in turn limit population growth. Lastly, regulation on foreign direct investment is anticipated to contain overseas demand for Australian housing. In fact, after the Foreign Investment Review Board (FIRB) tightened regulations in 2015, the share of foreign buyers on housing demand has continued to fall.
All in all, the positive development in the housing market could lose steam in the medium run, with a rising vacancy rate. Housing demand may not be strong enough to meet the increasing housing approvals, unless immigration to Australia expands once again. Another possibility, actually complementary, would be to foster foreign investment although there may be a need to diversify the sources of investment to limit geopolitical/regulatory risks.
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