Australian Housing Affordability Reform Update

August 24, 2023

News just in! For the first time in a century, all state leaders attended a federal government roundtable to discuss the housing crisis. The outcome is a target to deliver 1.2 million new homes over five years, beginning in July 2024.  

However, the announcement was met with scepticism from leading industry analysts. CoreLogic's Tim Lawless opines, "This (1.2 million homes) sounds ambitious, considering building commencements will hit an 11-year low in 2024…. (and) dwelling approvals have plummeted since the end of the Homebuilder grants back in March of 2021".  

Furthermore, according to the NHFIC (National Housing Finance and Investment Corporation), the Australian housing market will remain undersupplied through 2028 or beyond.  

"So, it simply comes back to very high levels of population growth at the moment, coupled with a relatively subdued pipeline of approvals in the wings", Lawless concludes.  

Let's not forget that even at peak productivity, the nation has never built more than 1.1 million homes within five years.  

Government Promises Big (?) Dollars

Faced with these hurdles, the government's logic is to throw money at the problem, promising an extra $3 billion in funding. It is positioned as a 'new home bonus' for states and territories that achieve more than their share of the new build target. A further $500 million 'housing support program' is also aimed at funding essential services and amenities to kickstart development and speed up completions.

These sound like big numbers until you consider they are less than 1% of the $350 billion or more needed to deliver these 1.2 million new homes.  

Moreover, the government-legislated rise in minimum wages, coupled with high construction labour costs, and further labour competition from a surge in government-funded infrastructure projects will no doubt push construction prices even higher.  

How the individual states plan to deploy this 'new home bonus' remains unclear. However, it's likely to cause a surge of activity in Greenfields suburbs. A national 'planning reform blueprint' will focus on fast-tracking and streamlining the planning, zoning and land release process in these areas in addition to setting out housing supply targets and outlining where higher densities should be concentrated.

When faced with the prospect of developing further infrastructure to support this growth, we can assume there will be a federal desire to encourage urban infill around existing infrastructure – lessening the government's burden. However, most of the responsibility for this infill development will rest on small developers – most of which are mom-and-pop operations.

Challenges To Supply

These small developers have recently been slapped with hurdles, such as removing interest deductibility before occupation, increased compliance and construction costs, tougher loan serviceability tests, and higher mortgage rates. To muddy the waters further, the labour government keeps flirting with negative gearing reform. Unless conditions for investment and finance of construction ease, its our opinion the housing supply bottleneck won't open far enough and these investors will shift their focus to quick win-type acquisitions rather than protracted projects.

When it comes to large developers and their financiers, they are also receiving mixed signals from the government. On the one hand, the federal government has made a sound announcement to finally reduce the MIT withholding rate from 30 per cent to 15 per cent for eligible build-to-rent housing projects and make our market internationally competitive for institutional rental investment for the first time – potentially delivering 150,000 new apartments across the next decade. At the same time, a Thin Capitalization Bill is being discussed, which, according to Mike Zorbas of the Australian Property Council, "directly scores an own goal on housing affordability in this country" and immediately puts at risk financing for 20,000 new homes under construction and it also puts at risk those 150,000 apartments anticipated over the next decade.

Whichever way you slice or dice this situation, it results in little clarity for both big and small investors alike. Without confidence from the government, we will unlikely see significant moves from investors to stimulate housing supply in the immediate future, and undersupply will continue to buoy prices up.

A Window of Opportunity

As of August 2023, the Sydney market is showing an inflection and signs of recovery - representing a short window of opportunity to take advantage of the buyers market before it turns back in sellers favour. In the famous words of Warren Buffet, “be fearful when others are greedy, and greedy when others are fearful.” Where can you find good investment opportunities today? Read on here.

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